Market Recap – An Interesting New Year Ahead of Us

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Market Digest – Week Ending 12/30/2016

U.S. stocks were down for the week, but the year finished with solid gains that caught many by surprise. The S&P 500 was up 12%. Other asset classes were generally positive, but the trend of U.S. stock leadership continued. International stocks returned 5%, U.S. bonds 2%, and international bonds just 1%. After three consecutive down years, gold and commodities rebounded, up 8% and 18% (as measured by DBC, the PowerShares DB Commodity Index Tracking ETF). Oil drove the commodities gain, up 45%.

Weekly Returns:
S&P 500: 2,239 (-1.1%)
FTSE All-World ex-US: (+0.5%)
US 10 Year Treasury Yield: 2.44% (-0.11%)
Gold: $1,152 (+1.8%)
USD/EUR: $1.052 (+0.7%)

Major Events:
• Tuesday – The Case-Shiller 20 City Index rose in October, bringing prices 5.1% higher than a year ago
• Tuesday – The Consumer Board’s Consumer Confidence measure rose, hitting the highest level since 2001
• Thursday – A late surge in holiday shopping led some consumer research firms to predict this will be the best holiday season for retailers in years
• Friday – Russian President Putin said he will not expel U.S. diplomats in response to the Obama administration’s decision to kick out dozens of alleged operatives; Trump tweeted praise for Putin

Our take:
Capital markets were kind to most investors in 2016, but many failed to keep up with standard index returns. A correction in the first quarter, Brexit in the second quarter and the U.S. election last month spooked many into selling at the wrong time. Looking ahead, 2017 should be an interesting new year. People say that every year, but heading into the ninth year of a U.S. stock bull market with an unpredictable new president and a less dovish Fed makes for a particularly interesting mix.

The first year of a president’s term tends to be more volatile in general because there is heightened uncertainty and more potential to pass meaningful legislation. Trump has bold views, no government track record to look back on, and a Republican Congress, so this volatility is magnified. Now, higher expected volatility doesn’t necessarily mean a bad market; it just means bigger moves are more likely, which includes possible upside potential.

Nearly everyone was happy with returns in U.S. stocks in 2016, but they were actually pretty average by historical standards. While not widely appreciated, these kind of “normal” years are not very common. Either a down year or a bigger up year happens more frequently. On a positive note, we still see more fear than greed, and don’t see many people predicting a big up year for 2017. The market likes to travel the road least expected, so another double-digit advance shouldn’t be ruled out.

U.S. stocks have dominated this bull market. International stocks are actually still well below pre-crisis levels, and bonds have been pretty flat the last couple of years. To us, this is another great reason to stay diversified. Asset class leadership has always been and should always be cyclical. What matters is not how you perform relative to the U.S. market in any one year, but over full market cycles. The best chance for success comes from a diversified strategy that is tailored for your goals and risk tolerance, and is rebalanced periodically.

Thanks for reading our weekly Market Digest this year and from all of us at Personal Capital, we wish you a happy and prosperous 2017.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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