Market Overview: Fourth Quarter 2016

2016 was a year of surprises and changes for the markets. Investors began the year with fear of a possible recession but ended it with renewed hope and optimism. The chart below illustrates the 2016 performance of large-cap stocks that make up the S&P 500’s, some of the year’s more impactful surprises and market events. 

We started the year with growing fears of a U.S. recession, a slowdown in China’s economy and currency devaluation plus a drop in oil prices. These concerns hit their climax in the first part of February with the S&P 500 pulling back 10.5%. By the end of the first quarter however, the fear had mostly subsided and the market had recovered its year-to-date losses ending in positive territory up 1.3%.

Late in the second quarter market volatility returned as fears and concerns related to the Brexit vote came to the forefront. Before the Brexit vote, equity markets pulled back as the consensus was Great Britain would vote to leave the European Union (EU). However, days before the vote, sentiment and polls that indicated they would not leave the EU caused the market to recover. The day before the Brexit vote the S&P 500 was up about 3.7% for the year. Two days after the vote the S&P 500 had dropped over 5% in reaction to Britain’s decision to exit the EU. Once investors had the chance to digest what the vote would actually mean and where the most impact to economies would be, the S&P 500 recovered, ending the first six months of the year up about 3.8%.

The third quarter began with the market continuing its Brexit vote recovery, increasing about 9% from the bottom of its reaction to the vote. At that point we had relative calm and for much of the remainder of the summer, the S&P 500 did not experience a single day with a drop or gain over 1%. This calm ended about a week into September when concerns over the uncertainty of the Presidential election became the focus for investors. From this point through the Presidential election, volatility returned to the markets.

The fourth quarter, like the first, started with some unknowns and fears as concerns over the presidential election continued. From the start of the quarter until Election Day the market pulled back about 1.1%. As election results came in during election night which differed from media and consensus expectations, the S&P 500 futures dropped over 5%. By the time the market closed the day after Election Day, not only had it recovered from this drop, it had gained an additional 1.1%! With the expectation of a more business-friendly administration the S&P 500 continued its upward trend through the remainder of the year and ending up about 12%.

For emerging markets, a better economic growth outlook resulted in a rebound of equites, resulting in a gain of 11.6% for the year. This nearly equaled the S&P 500 and greatly outperformed the developed international market’s 1.0%. Developed international markets, while arguably more attractive from a valuations standpoint, continue to experience slow growth. In addition, the strong U.S. dollar continued to act as a drag on performance, particularly for the European and Great Britain markets.

Bonds (as measured by the Bloomberg Barclay’s U.S. Bond Aggregate) started the year off with a strong start as the 10-year Treasury yield fell to an all-time low. However, as interest rates started to rise by year-end, bonds gave back much of their gain ending the year up 2.6%.

It was an interesting year as volatility returned and asset classes that had been underwhelming in prior years moved to the forefront of performance.

If you have questions on the market or want to know how your portfolio matches up to market expectations, contact your Smith & Howard Wealth Management advisor. We will be glad to discuss with you.

Read more about this in our Fourth Quarter Economic Overview here and our Asset Class Summary here.

Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.