Donald Trump is inheriting one of the strongest economies that has been handed to a new President in recent history (based on 3Q GDP). Since the 1970's, only George H.W. Bush and Jimmy Carter assumed the office with higher GDP growth rates. Further, investors have been cheered by Trump's anticipated business-friendly ambitions on taxes, trade and regulations and have driven U.S. stocks to record highs. The S&P 500 Index gained 3.8% for the fourth quarter of 2016 and 12.0% for the year. Small stocks, as measured by the Russell 2000, rose 8.8% for the quarter and surged 21.3% for the year.
Quarterly Commentary 2016
Brexit? What Brexit? Investor angst over the unexpected vote on Brexit was short-lived with a "risk-on" theme returning to the markets in July and leading to stock market highs for the Dow, NASDAQ and S&P 500 in August. Highly unusual election antics and continued geopolitical concerns on a number of fronts did not dampen investors' risk appetite or their quest for yield. Emerging markets equities posted their best quarterly return since 2012, outperforming developed markets. High yield bonds were also top performers. Volatility was exceptionally low throughout the quarter as investors appeared to be somewhat complacent about continued accommodative policies from central banks and steady, albeit slow, economic growth.
The 2nd quarter was reasonably uneventful and markets were relatively placid until June 23rd, when British voters narrowly approved the Brexit referendum. Investor complacency was replaced with shock, and markets reacted fiercely. Volatility spiked, global bond yields fell sharply, the pound hit a 31-year low with a record intra-day swing of more than 10%, stock markets plunged, and gold surged. Two trillion dollars were erased from global equity markets in one day, marking the largest daily loss ever. While markets stabilized to some degree in the ensuing days, much uncertainty remains around virtually every aspect of this unexpected outcome, and we can expect continued volatility as the process unfolds over the foreseeable future. Following the vote, the UK was downgraded by S&P and Fitch to AA and while the full implications of this decision will be unknown for some time, economic conditions in the UK are widely expected to deteriorate, with monetary easing likely sometime this summer.
The first quarter of 2016 revealed a dramatic tale of two halves, split nearly evenly between "risk off" and "risk on" sentiment. Falling commodity prices and broad-based concerns over global economic growth contributed to poor performance in both the equity and corporate bond markets, as well as a sharp rally in US Treasuries through mid-February. February 11th marked the intra-quarter low in US stocks, oil prices, high yield bonds and risk appetite. WTI crude oil prices hit a multi-year low of $26/barrel, down from $37 at year-end, before rallying nearly 50% to close the quarter at $38. The VIX Index, a measure of volatility, spiked to 28 on February 11th and fell throughout the remainder of the quarter to 14 as of 3/31. And, the 10-year Treasury hit 1.66% on February 11th, 61 bps below its 12/31 level. The S&P 500 suffered its worst start to a year ever, falling over 10% through February 11th only to rally 12% and close the quarter up 1.3%.