STOCK MARKET COMMENTARY – FOURTH QUARTER 2016 – RETROSPECTIVE AND PROSPECTIVE

STOCK MARKET COMMENTARY – FOURTH QUARTER 2016 – RETROSPECTIVE AND PROSPECTIVE 

A Year of Surprises

Stock Market Commentary 2016 year surprises Brexit Trump flight

Stock Market Commentary – 2016 has been a year full of surprises with Brexit and Trump taking flight.

“Economists are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do- and nothing is more unpredictable.”- Thomas Sowell

“It is an endless procession of surprises. The expected rarely occurs and never in the expected manner.”- Vernon A. Walters

 

2016 has been a year full of surprises. Several major events did not go the way of “expert” prediction; most notable were the vote in the UK to leave the European Union (Brexit) and the outcome of the US presidential race with Donald Trump winning.

The Canadian stock market continued its advance for the year as the S&P/TSX Index increased 4.5% for the quarter bringing the year’s return to 21.1%. For the year, Materials (+41.2%) was the best performing sector followed by Energy (+35.5%) and Financials (+24.1%). In the fourth quarter, the best performing sectors in the Canadian market were Financials (+11.5%), Energy (+7.0%) and Industrials (+5.3%). Post-election euphoria appeared to drive the US market as the S&P 500 advanced 3.8% in the quarter bringing the annual return to 12.0%.

 

                     Canadian Dollar

US Dollar

 

 

Q1

Q2

Q3

Q4

YTD

Q1

Q2

Q3

Q4

YTD

 

 

 

 

 

 

 

 

 

 

 

Toronto Stock Exchange

4.5%

5.1%

5.5%

4.5%

21.1%

 

 

 

 

 

S&P 500

-4.7%

1.9%

5.4%

6.4%

8.8%

1.3%

2.5%

3.9%

3.8%

12.0%

MSCI EAFE*

-9.5%

-3.2%

7.3%

1.5%

-4.6%

-3.7%

-2.6%

5.8%

-1.0%

-1.9%

91 Day T-Bill

0.1%

0.1%

0.1%

0.1%

0.5%

 

 

 

 

 

CUBI**

1.4%

2.6%

1.2%

-3.4%

1.7%

 

 

 

 

 

CDN/US dollar

6.7%

-0.3%

-0.7%

-2.3%

3.1%

 

 

 

 

 

* Europe, Asia and Far East Index

** Canadian Bond Universe Index

Although the year as a whole turned out to be positive for the markets, it did not start out so well. Following the modest rate hike by the Federal Reserve (Fed) in December 2015, the S&P 500 declined 8% in the first ten trading days of 2016, and it was still down 10% after the first 28 days. This was the worst start for the S&P 500 in history. The Royal Bank of Scotland (RBS) issued the opinion: “Sell everything”! The gloom continued into early February as fears of a slowing Chinese economy fostered volatility in oil prices and upset many participants in the high yield markets. Investors were concerned that the US economy may have peaked and a recession may be at hand but from mid-February they became more sanguine as economic indictors continued to reflect an expanding economy.

Then on June 24th, the UK vote to leave the European Union came as a surprise to the pundits, media and the investment community.  As the prognosticators had predicted, initially stock markets went down sharply but to their surprise, markets recovered after a few days. Prior to the US presidential election, the media and pollsters were again forecasting that stock markets would implode if Donald Trump won. There was a violent sell-off that night, but the markets recovered quickly and went on to record the longest running post election rally in history.

While all of this was occurring, the European migrant crisis persisted causing vexation within the local populations and spurring more radical political movements. A disturbing trend from an investor's point of view has been the rising volume of anti free trade and globalization rhetoric. The underlying financial problems within the European Union with respect to Portugal, Italy, Greece and Spain remain unresolved as if politicians are hoping that a "deny and delay" policy will push these crises onto future governing bodies. Other issues that continue to persist include disturbances in the Middle East (particularly Syria), Chinese hegemony in the South China Sea, Russian incursions into the Ukraine and Syria (and maybe even US politics), etc.

As we head into 2017, we will carry all of this baggage with us as well as face many new, yet unknown disruptions as we do every New Year. While it is not known what the longer-term consequences of a Trump presidency will be, the US economy is expanding and it is unlikely that policies would be introduced to intentionally stunt that growth. While investors played a waiting game with the Federal Reserve in 2016, it appears that there is now confidence in the strength of the US recovery to allow interest rates to increase. In Europe, despite problems in a number of areas, the overall economy is exhibiting signs of more stability and even some growth. While growth in the emerging economies has slowed, growth relative to the developed world is robust producing greater wealth and higher demand for goods and services

Technology continues to reshape our world in an ever-accelerating fashion. There will be winners and losers in this trend, but change is inevitable. 2016 is still fresh in our minds. 2017 will bring more shocks and surprises. Investors will prosper if they stay fast with their discipline and do not get distracted by the turbulence that surrounds them. As Howard Marks, a famous value investor, has stated: “No one really knows what events are going to transpire… no one knows what the market reaction will be.”

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The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.  

 

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