In July 2016, average global temperatures were the warmest on record for any month in the last hundred years or so. The previous record was set in July 2015. [i]
While temperatures were rising across the globe, interest rates were rapidly dropping. To represent this, the ten year treasury touched down at 1.37% on July 5, 2016 providing a major tailwind to fixed income investments (in general, prices of bonds drop as interest rates rise and vice versa, prices of bonds rise when interest rates decrease, all else being equal). The Barclays U.S. Aggregate Bond Index returned 6.04% from the first of the year to July 5, 2016. During this “flight to quality” period, investors continued to pour money into fixed income, despite the low prospective returns.[ii]
More than 11,000 athletes took place in the Games of the 31st Olympiad “in Brazil. Despite controversies, including the instability of the Brazilian government and health and safety concerns centered on the Zika virus, the games were largely a success in promoting sport and the Olympic spirit across the globe.
Equity returns were strong in emerging markets through the end of August 2016. The MSCI Emerging Markets index returned 14.9 percent, offering some of the best performance in equities over that period. One of the specific top performers in the emerging market index was Brazil. Brazil was one of the worst performing emerging market in 2015. Despite the instable government and health concerns, the Brazilian equity market recast itself in 2016 providing an amazing 33.6 percent return from the beginning of the year through the end of August 2016 as indicated by the local Brazilian Bovespa index.[iii]
Beginning on September 30, 2016 the 41st Ryder Cup was held at the Hazeltine National Golf Club in Chaska, Minnesota. The United States defeated Europe for the first time since 2008 recasting it as golf’s winning team. Unfortunately the golfing community lost a truly beloved person: Arnold Palmer, who passed away a few days before on September 25, 2016. Palmer is one of golf’s true legends of the game, who came onto the scene during the television age. While Arnold Palmer was certainly an incredible golfer, many also remember the Latrobe, Pennsylvania native for his outstanding character, respectfulness, and integrity.
Outside the golf course, the U.S. was relatively flat when reviewing domestic index returns. The S&P 500 had almost no return and the Barclays U.S. Aggregate Bond Index was down 0.1 percent for the month of September. The MSCI EAFE and the MSCI EM indexes produced identical returns of 1.3%, offering some consolation for Europe’s Ryder Cup loss. [iv]
Reality TV star Kim Kardashian West was robbed at gunpoint after being detained at a luxurious apartment in Paris. The thieves made off with an estimated $9 million in jewelry. America’s internet darling was shaken, but unharmed. Millions of fans were left stunned at the brazen attack on America’s social media and reality TV star in Paris.
While the internet was abuzz with Kim Kardashian West and the robbery, the markets were roiled by the upcoming election and the uncertainty it could cause. Most major equity markets were down for the month, as the Russell 2500, which features smaller sized U.S. companies, sold off to the tune of 4.1 percent in October. The S&P 500 was down 2 percent and the Barclays U.S. Aggregate Bond Index was down 0.8 percent for the month, offering little relief for a globally diversified allocated portfolio. [v]
On November 8th, 2016, the Republican ticket of businessman Donald Trump and Indiana Governor Mike Pence defeated the Democratic ticket of Hillary Clinton and Tim Kaine. Despite losing the nationwide popular vote and trailing in most pundit polls, Trump received 304 electoral votes to Clinton’s 227, securing the victory. On a promise to “make America great again”, Trump appealed to millions of angry supporters who needed and demanded a change.
The election wasn’t the only recast in November. On a promise of rebuilding America and lowering tax rates, equity markets raced ahead. The S&P 500 returned 3.7 percent while the Russell 2500 posted an 8.5 percent return for the month of November. International markets were not as lucky and sold off. Trump upped the ante for tough trade talk and a strengthening dollar hurt overseas markets. The Barclays U.S. Aggregate Bond Index sold off quite a bit ending down 2.4 percent in the month of November, erasing a considerable amount of gains from the first half of 2016. The driving force was higher interest rates, reflecting some combination of elevated growth and inflation expectations. [vi]
While tech savvy California revoked Uber’s self-driving car program due to public safety concerns and permitting issues, Pittsburgh rolled along operating driver-less cars. Uber set up a driverless technologies research center in Pittsburgh, packed with Carnegie Mellon University’s robotics experts assembled over the past few years. The vehicle of choice for Uber driverless car is the Volvo’s XC90 sport-utility vehicle, outfitted with cameras, lasers, GPS, and plenty of high- tech equipment to navigate downtown Pittsburgh’s roads, hills, occasional pothole, and street layouts that would make engineers cringe.
Equity markets continued to roll along in December as well. The S&P 500 climbed another 2 percent in December, finishing the calendar year 2016 with a 12 percent total return. Building on the returns of the strong November, the Russell 2500 added another 1.9 percent in December, finishing the calendar year 2016 up 17.6 percent. The MSCI EAFE index rallied for 3.4 percent in December and finished the calendar year 2016 in positive territory at 1.5 percent. Equity returns were strong domestically, but global asset allocation was hampered a bit by the sluggish international markets. After a turn of events and a market recast, the Barclays U.S. Aggregate Bond Index returned a more meager 2.7 percent for the full year after a strong first half. [vii]
As 2017 begins, we have a new President in Donald Trump and can expect political and economic policy changes with the new Administration. Stock market valuations appear elevated after the strong rally but reasonably priced if corporate earnings accelerate. International markets remain challenged, but also relatively attractive from a valuation perspective. Fixed income remains a difficult market with the possibility of rising interest rates but provide a ballast of safety from the ever volatile equity markets. Global asset allocation continues to offer the opportunity of diversification and balance of the risk/reward equation.
Investment in the portfolios mentioned in this document may not be suitable for all investors. Past performance is not a guide for future performance and should not be the sole factor in consideration when selecting investments. The price of investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. Levels, bases and reliefs from taxation can change.
Past performance is no guarantee of future returns.
A word about risk: Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in the bond market is subject to certain risks including market, interest rate, issuer credit and inflation risk; investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuation, economic and political risk, which may be enhanced in emerging markets.