Wow. What a year. If you’re like us, you probably spent New Year’s Eve shaking your head in a mix of shock, awe and bewilderment. Let’s do a quick recap on what shaped markets (and the world) this year:
January: It was a rough start to the year for the markets. I suppose that shouldn’t surprise anyone considering January has been a negative month each of the last four years. But events conspired against the market to make it a particularly interesting ride. China was showing slowing economic growth and their stock market was collapsing. Oil prices were plummeting. And the Federal Reserve had just announced their intention to raise rates four or more times in 2016 (more on that later…).
The markets were in a predictable pattern. On any given day, with near certainty, the market was going to act by looking at two figures before the open: what did China’s stock market do overnight and how was oil trading. The U.S. markets were locked blow-for-blow with these two indicators in a way that made no logical sense (theoretically lower oil prices should be better for the economy!).
At the time, we were focusing on the fundamental strength of the market and saw no risk of economic collapse. But when the market is down 14% that can sometimes be a difficult story to swallow. Thankfully at the end of the month, the market started to recover as we looked forward into…
February:
…when the market started to immediately turn south again! What was going on? In short, the market still couldn’t get itself off the oil story. But as the markets again ended up at nearly the same levels we saw in January, it also presented an opportunity. As you might recall, that is when we made the decision to purchase an S&P 500 Index Fund into our Conservative Growth and Balanced Portfolios. As the great Warren Buffet has said: “Be greedy when others are fearful”. We took that advice to heart and that trade (BTIEX) ended the year up (including dividends) 21.96% since its purchase on February 12th.
March:
March was a better month as things began to return to “normal” and the market started to go on a nice run, up over 4 percent for the month. The Federal Reserve, after their promise of consistent rate hikes, took the opportunity to…do nothing. On the political front, however, things started to heat up. After the Super Tuesday elections on March 1st it became apparent that Donald Trump was very likely to win the Republican nomination as some of his top competitors, including Ben Carson and Marco Rubio, withdrew from the race. At the same time, Hillary Clinton was having a hard time closing out Bernie Sanders as he picked up wins in states like Washington, Hawaii and Alaska. If only the pundits could have realized this might be a sign of things to come…
April:
April was a quiet month in the markets as politics and international affairs to center stage. The markets were off less than 0.5 percent for the month.
May:
Yet another quiet month in the markets as the stable but positive movement continued. The market was up approximately 1.5 percent for the month and – for those invested with Brian Boyle – we started to see some positive direction with stocks like Birchcliff Energy (up 5.8 percent for the month) foreshadowing what would be a very exciting second half of the year in equity portfolios.
June:
Yet another quarterly Federal Reserve meeting and yet another announcement of no rate hikes. We’d love to give the Fed credit for knowing what was going to happen later in the month, but that might be a bit too generous (this is, of course, the organization that has one of the worst records for predicting future economic growth). But this time the decision may have been timely because, on June 23rd, the investing world was rocked with Brexit.
To be fair to the Fed, no one saw this coming. Not the pollsters, not the pundits, and certainly not the market. But while the market reaction was swift (down 5.5 percent over two trading days) it was also short-lived as the market reached historic levels just 10 trading days later. Six months later, no one can truly tell us what is going to happen in Great Britain in the next few years. But, more importantly, many missed the warning signs of what this could mean for the upcoming U.S. elections.
July:
The market went on a tear in July with the S&P up almost 3.6% as the world decided Brexit wasn’t going to bring the world economy to its knees. Elsewhere, the political season kicked into high (higher?) gear as both Donald Trump and Hillary Clinton received their respective party nominations.
August:
August was a generally flat month for the markets as most of the world went on vacation. The S&P 500 was up just over 0.1 percent. August was also a time when we put our next big strategic portfolio move into play. As research has shown, the 60 days leading up to a Presidential election are the most volatile in the market every four years. With our tremendous success in the first eight months of the year, we decided to tap the brakes on portfolios and reduced our overall market exposure. True to form, markets didn’t disappoint as in September…
September:
…markets suffered their first negative month since April. The market ended the month off just 0.1 percent, but at one point was down nearly 3 percent. In the meantime, the Federal Reserve had yet another quarterly meeting without a rate hike, completely invalidating their December 2015 projections. At this point it seemed all but certain a hike would be inevitable in December.
October:
With political season in full swing, the markets continued to be volatile. The S&P was off nearly 2% for the month, led largely by the market’s correction around the news the FBI was reopening its case into Hillary Clinton’s emails. This was a sterling example of the market (along with every pundit and pollster in the country) firmly placing their bets on a Clinton presidency.
November:
The biggest news of November – of course – was the Cubs World Series Victory. Go Cubs Go! (Dorr made us include this…)
But then things REALLY got interesting! If you attended our Fall Economic Forum on November 1st, you heard us talk in depth about the Presidential election. The short version of our interpretation of things went like this: anyone who is writing off Donald Trump in this election is making a mistake as evidenced by the Brexit vote. More importantly, if Trump is elected, we expected a sharp market correction very much like Brexit.
We were right – sort of. As you may recall, the evening of the election Dow Futures were off more than 900 points. Given reasonable market valuations, a stable and growing economy and accommodative monetary policies, we had a plan in place to take advantage of a correction. We were licking our chops to get to the office on Wednesday morning to take advantage of it. Sadly, the markets didn’t play ball and had turned around overnight. Since election day, the S&P 500 is up over 5%.
November is also the month when we made our final major move in portfolios for 2016. While our strategy to capitalize on a Trump-induced market correction didn’t materialize, we did jump on another change we’d been looking at for some time. As you may recall, we moved almost entirely out of the small cap space in our core portfolios in 2013. At the time, they were
overheated relative to large cap stocks and we feared a correction. It has happened and now we believe the opposite scenario is true: large cap is overvalued relative to small cap. After the election we took the opportunity to reduce our large cap weighting in both the Balanced and Conservative Growth portfolios and replace it with exposure to the small cap space via the PNC Multi-Factor Small Cap Core Fund (PLOIX).
December:
The markets continued their obsession with Trump and projections about what his policies might mean for the economy and corporate earnings over the next four years. In the meantime, the incoming President didn’t waste any time using his Twitter account to go after companies or policies that he might object to. Incidents like his targeting of Boeing for their Air Force One contract or Lockheed Martin for their F-35 contract showed the power of the Presidential Twitter account on a stock portfolio. He was also aggressive in promoting job growth and working to keep U.S. manufacturing jobs in the United States.
And…finally…the Federal Reserve decided to raise rates 25 basis points at the close of the year – exactly what they did in 2015. While their guidance was a bit more muted than last year (predicting 3 rate hikes in 2017), the addition of several new and more dovish voting members of the Federal Open Market Committee has the markets wondering just how likely it is they will keep their word.
Looking Forward
So, what does all of this mean for 2017? That’s the question many are asking. More importantly it’s the question no one can claim the ability to answer perfectly. We vividly remember the “fire and brimstone” 2016 market projections the pundits were spouting. One is a particular favorite: The chief economist from Société Générale (who is admittedly a “perma-bear”) predicted the S&P 500 would drop to 500 this year. Shockingly his projections were only off by a bit more than 400%! If you took his advice this year, you’re likely rethinking your retirement plans.
What 2016 (and the last decade to be fair) has taught us is things are never nearly as good – nor as bad – as the pundits would like to make them. In the end, all we can truly rely upon is the fundamentals of the economy, the market, and the companies we invest in. As was once said, “you make all your money the day you buy something, not the day you sell it.” Thus, if we focus on buying assets correctly, short-term trends may make us fret, but the long-term results should be positive.
It is the fundamentals that have us acting cautiously today. Generally optimistic, to be sure. But cautious nonetheless. There is no doubt that the U.S. economy continues to improve. Job growth, GDP growth, inflationary trends. Nearly any fundamental statistic you look to is showing positive signs. Where our cautious optimism comes in, however, is how aggressively the market has responded to the Trump election.
Just before the election, billionaire tech investor Peter Thiel summed up his reason for believing Trump would win the election. He nailed it when he said:
“…the media is always taking Trump literally. It never takes him seriously, but it always takes him literally. I think a lot of voters who vote for Trump take Trump seriously, but not literally.”
The market did something a little different than the media. Prior to the election, it never took Trump literally or seriously. Frankly, the market never thought he had a chance. That’s why, according to Politifact, Wall Street gave Clinton more than $64 million while the Trump campaign received less than $2 million.
After the election – maybe to make up for their oversight – the market is now taking Trump both seriously AND literally. They can’t help but take him seriously. He is the incoming President of the United States after all. But the level they’re taking him literally is what has us being a bit cautious.
It’s as if, immediately after the election, traders on Wall Street said “Wow…we better go back and read those speeches he gave!” and then started making massive bets on Trump’s proposed policies. If you look at what has led the charge in the market over the past two months, it’s almost directly linked to what Trump said on the campaign trail. Trump said he was going to deregulate the banks? The banking index is up over 23 percent since election day. Trump said he’s going to invest $1 trillion in infrastructure? The PowerShares Dynamic Building and Construction ETF is up almost 17.5 percent since the election.
Coming back to our thesis – things are never nearly as good or as bad as the media would like to make them out to be. We’re optimistic about what the next year can bring for our country and our economy. We also don’t think Donald Trump can wave a magic wand and make every campaign promise become a reality. In the end, investing in fundamentals is always our safest bet. We’ll continue to be very active managers on your behalf and hope to use 2017 to build on a tremendous 2016 in portfolios. There are exciting opportunities ahead. But we won’t be shy about tapping the brakes again if it is justified.
We hope you had a very happy and family-filled Holiday Season. We look forward to working hard on your behalf in 2017!
