Q4 2016 RECAP

A STUNNING POLITICAL UPSET RESETS AGENDA

 

  • U.S. equities lead way with multiple records.

 

  • Sovereign debt prices saw a sharp reversal. The 10-year T-note topped 2.6% in Q4, closes 2016 with a loss. Yield curve steepened.

 

  • Fed moved a 2nd time. Forecasts 3 hikes in ’17 – surprised markets.

 

  • Europe & Japanese equities recovered to post positive returns. Trailed the U.S. in ’16.

 

  • U.S. dollar index at 14-year high, a strong Q4.

 

  • Oil reversed again – a 2nd bull market in 2016

 

 

 

 

 

 
 

 

Through the benefit of time, the fourth quarter of 2016 will be etched in folklore forever. Truly one for the ages…the investment world did a somersault November 8th.  Well before the high drama, in October, while the political heat was peaking, bond yields were beginning to lift, oil prices were floundering, and most importantly stock prices were in the doldrums. For the record, in the US, stocks declined for nine consecutive days, the longest streak in more than three decades. However, one can make numbers dance, and while the string of negative sessions is accurate, the cumulative amount of the decline was 3%, and nowhere near the 9% in 1980. That was wiped-out in 2 days leading-up to Election Day. So, markets went into November 8th on the upswing. Then, a major upset at the polls. Donald Trump surpassed pollsters’ expectations, set to become the nation’s 45th president January 20th. On that night, history was made. Two happenings, simultaneously, made a stunning reversal possible.

The consensus view: The Senate was a toss-up, too close to call. With odds high of a Clinton win, the Senate was the key to balance the White House and Congress. Instead, a potential Trump victory was cause for uncertainty and markets sold-off overnight. Then, a number of Senate seats did not flip as expected. From that point forward markets headed north. Forecasts (plural) were turned upside-down, the Republican Party had won a clean sweep of the executive and legislative branches, and with it a new perspective on economic growth, tax reform, and regulatory supervision. This new outlook took place in the small hours of the morning before Wall Street’s opening bell. Of significant importance, and a large slice of the forward momentum since Nov. 8th, is directly a result of a Republican president, Senate and House for the first time in more than 60 years! For now, all the possibilities, the positives and negatives, are being categorized and recalibrated. Potential deregulations in financials and energy are receiving investors’ approval, while the threat of trade tariffs are being seen as negotiating tactics – at least for now. Time will tell.

Calendar year 2016 proved to be a tale of two-halves for many asset classes. The same can be said of Q4. In percentage-terms, Treasuries moved the most, with losses in all maturities, near double-digits on the far-end. Stocks recovered unevenly. The Dow Jones did best, but one has to consider the narrowness of 30 stocks. The S&P 500 index, the US benchmark, was up 5%, though from the very low point on Futures to its high, the upswing was more than 10%. In Commodities, oil gained while gold lost value. WTI is closing at its best price of the year, while gold has lost most of its early luster. At one point, gold was in a bull market (up more than 20%), but succumbed to a strengthening dollar and higher yields.

Questions abound at year-end, as is always the case. The most pressing ones center on the new administration. What will be the priorities in the first 100 days (already emphasized by the Trump team)? Consensus says corporate tax reform tops the list…true? And, if so, will that be parlayed with tax repatriations? A one–two punch? How about easing of regulatory rules, and the net effect on financials, energy and health care? Infrastructure, a huge word bantered about as an automatic. How much and how long will it take to put plans to work? Overarching all possibilities as we venture into 2017 is a domestic economy that appears to be getting stronger.

 

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