The year 2016 has been a very interesting year on the economic front. (Not to mention, on the political front.) It began with a steep double-digit plunge in stock markets in January and into February and ended with a six-week market rally following the election.
Overall, global stocks performed reasonably well. U.S. stocks again took the lead, with larger-cap U.S. stocks gaining 11.8% and smaller-cap U.S. stocks surging 21.6%. Developed international stocks returned just 2.7% in U.S.-dollar terms. European stocks in particular continued to face headwinds, falling 0.4% on the year. In both cases, the strength of the U.S. dollar weighed negatively on returns.
The overall U.S. bond market gained 2.5% for the year. But that hid a 3.2% tumble during the fourth quarter, as rising interest rates resulted in the worst quarterly performance for bonds in 35 years. Expectations for rising inflation, along with the Federal Reserve’s December decision to raise interest rates for the first time since August 2015, further contributed to falling bond prices.
Three additional interest rate hikes planned by the Fed in conjunction with likely increased spending by congress could cause the bond picture to see further downward pressure.
Economic Picture Going Forward
We expect to see firmer signs of a pickup in growth in the U.S. and other developed economies, as well as large developing economies such as China and Brazil.
We continue to believe European corporate earnings, and eventually stock prices, are poised for recovery—though calling the precise inflection point is, of course, impossible. In contrast, U.S. stocks appear overvalued. Among their potential risks are historically high price-to-earnings multiples.
We remain confident that over a full cycle, valuations and earnings matter, while chasing short-term performance is a recipe for disappointment.
We have the wind at our backs in terms of our active stock managers’ performance and are optimistic that will continue as interest rates rise. If rates do continue rising, we also expect our alternative strategies to perform well.
Lastly, we underscore the importance of viewing investment performance from the perspective of long-term wealth planning. We work closely with our clients, both in building and adjusting investment portfolios suited to their individual risk tolerance as well as in tailoring broader wealth management strategies.
We very much appreciate the great opportunity to work with each one of you. We welcome your calls or emails any time with questions or comments.
Max W. Smith, CFP®, CIMA® | Kent G. Forsey, CFP®