By: Matt Garrott
What Happened in 2016
The stock market started the year on the wrong foot with a 10% drawdown. It was the worst start to a calendar year ever and prompted knee-jerk reactions such as the RBS note for their clients to “sell everything”. At the end of June, the UK held a referendum on whether to withdraw from the European Union. “Bremain” was the clear leader heading into the election as “Brexit” was viewed as dangerous and sure to drop the markets into a tailspin. Brexit won. There was an election here in the United States which also had a surprise outcome. All three of these events were supposed to be harbingers of disaster. Instead, stocks went on a tear as the S&P 500 gained 12%. The city of Cleveland also got in on the action. The Cleveland Indians lost a heartbreaking World Series, but UFC, minor league hockey, and NBA championships were all brought home to the greatest location in the nation, defying experts every step of the way.
The S&P 500 has been up for 8 consecutive calendar years (kind of – 2015 was negative if you don’t count dividends), but like my dad says, “It ain’t the years, it’s the mileage.” Since the market bottom in March of 2009, the S&P 500 has experienced a cumulative 287% return. For some perspective, it gained 450% from 1991-1999 so our current bull market has not climbed “too far, too fast” as some may argue. There is an old Wall Street saying that the market takes the elevator down and the stairs back up. Maybe it should be revised as we’ve been strolling up a ramp for the last 8 years. Looking back, it can seem like the recovery has been a gentle walk, but this slow stroll hasn’t been without its hiccups. During the recovery we’ve had 4 corrections (10% or greater drawdown). Each of these was supposed to be the end of the bull market so congratulations if you didn’t get scared out of your allocations.
Just like every year, 2016 was supposed to be a stock picker’s market. Like most years, however, the S&P 500 beat the majority of active managers, this time outperforming 75% of the competition.
2016’s Buzzwords: Trump, Negative Interest Rate Policy (NIRP), Virtual Reality, Brexit
Outlook for 2017
Once again, the popular prediction for next year is that it will be ‘difficult’ for the markets. When was the last ‘easy’ year? I have to agree that 2017 may be difficult if you are a money manager charging 2&20. It will not be difficult for those investing with a long-term perspective. Most prognosticators seem to agree on low to mid-single digit returns for US stocks this year. There are some calls for a 10-15% correction, but this is a good reminder that the market experiences a correction of about 15% every year. Rather than fear a correction, expect one and welcome it as an opportunity to rebalance and harvest losses.
Most investment strategists expect infrastructure spending, lower taxes, and higher inflation from the new administration. How should you play these themes in 2017? First, what would you have done if you knew 2016 would get off to the worst start ever? What if you knew Brexit would pass? Or if you knew Donald Trump would win the election? Each of these scenarios not only defeated sophisticated prediction analytics, but defied their expected conclusions as well. All of these events were viewed as bearish before-hand. The best ‘play’ is to accept predictions as financial entertainment, not actionable data.
As is consistent with our philosophy, we continue to focus on controlling what we can control, embrace an open architecture approach, and create customized, elegant portfolios for our clients. Portfolio rebalancing and tax loss harvesting will continue to add value without having to be “right” about any predictions. A portfolio diversified across asset classes continues to be the most prudent way to protect against risks in the market. While much of our attention is on risk, we are also looking for opportunities and believe that equity investors are being rewarded as the markets return to fundamentals instead of day-trading the macro news cycle.
