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2016: A Year in Review

Each year, as we look back at the previous twelve months, it is hard not to be reminded of a few axioms. One is that financial markets and successful investing have little to do with the calendar or a twelve-month increment of time. Companies and financial markets are numerous and investors typically have very long investing time horizons, so a “year in review” is just an easy way to mentally make note of events and lessons learned during that year, but not always particularly helpful for the future. Secondly, I’m reminded of a Yogi Berra quote that says “it’s tough to make predictions, especially about the future”. Many pundits received a healthy dose of humility in 2016 when it came to predictions about markets, oil, and especially election results. Having written a few review pieces like this over the years, there were some surprises along the way in 2016, but there always are. As time passes, we easily forget what we were feeling and what the pundits were saying as these surprises were occurring and in hindsight things seem very neat and obvious.

Source: Blackrock/Bloomberg
Source: Blackrock/Bloomberg

After 2015, a year with bouts of volatility that ended roughly where it started both in the stock and bond markets, many investors were shaken when 2016 started off with a sharp selloff in the stock markets. The Dow fell more than 1,000 points in the worst ever five-day start to the year. There was a numerous supply of bears trolling the internet and network TV broadcasts, worried about China, low oil prices, and the increasing likelihood of the Fed raising interest rates. While we never underestimate how quickly volatility can show up and fundamentals start to change, we did suggest caution regarding making quick emotional decisions every time volatility arises (First Quarter Review- A Volatile Start to 2016). Thankfully by the time the first quarter had ended, the U.S. stock market had rebounded back into positive territory.

Back on June 23rd, the world’s attention was focused on the United Kingdom and its all-country referendum about whether it should stay or exit the European Union, of which it had been a member since 1975. The pundits and pollsters were pretty confident in a “stay” vote, but were proven wrong as 51.9% of voters elected to leave (BREXIT Happened, Now What?). As we have noted on several occasions, markets generally don’t like uncertainty, and they didn’t this time either, responding with a global equity selloff.

By the close of the 2nd Quarter (Second Quarter Market Update) a week later, stock markets had already bounced back. You can go pull the tape, but there was a large amount of speculation that an “exit” vote could mean certain financial disaster for the U.K. and global markets in general, which has proven to be wrong thus far. Bonds were enjoying an influx of demand by nervous investors who sought their “safety”, leading to good performance despite talk of interest rate increases at some point later in the year by the Fed.

In our 3rd Quarter review, entitled “How Quickly Things Change”, we highlighted a few developments that were playing into performance thus far in 2016. Those included (1) a U.S. dollar that had stabilized a bit from its rapid ascent in previous years, (2) oil prices that had stabilized into a trading range, (3) the Federal Reserve that had continued with dovish language regarding rate increases, and (4) the overall macro-economic data around the globe that was beginning to look fairly positive. The result of all this good news was that stocks of all types (U.S. and International) were positive. The smaller U.S. companies and Emerging Markets specifically were enjoying double digit returns. On top of this, the bond market was posting very good returns. Understanding that higher market prices can borrow from future returns, we suggested that the returns we were seeing in bonds specifically would be difficult to continue or repeat, and that future returns on stocks could likewise be lower if earnings didn’t increase substantially. As the year started to wind down, investors began to focus much more on U.S. Presidential politics and what the Fed may do with interest rates.

I don’t think it is a partisan comment to say that most observers were surprised by the Presidential election results. The political pundits were dumbfounded, and the equity markets were selling off heavily in after-hours trading as institutional investors attempted to digest a Trump presidency that had not been anticipated only hours before. Unlike market activity after the surprise Brexit vote, the U.S. markets had recovered by the time they opened the next morning, and a rally ensued in U.S. stocks. Investor hopes that policy changes could be instituted in an undivided Republican government, along the lines of reduced regulation, tax reform, and government infrastructure spending, fueled this increased optimism and the rally that ensued. The smaller cap stocks enjoyed the biggest rally post-election, but not all markets felt the same way. Emerging market stocks fell on the news, giving up some of their fantastic year to date returns through the summer. Some of this pullback in emerging markets could be based on fears of a more protectionist trade policy, but certainly the interest rate and currency impact of the December 14th Fed rate increase also played a role in this drop as well.  Perhaps the biggest reaction to the election results was in the U.S. bond market, which sold off (pushing interest rates higher) across the maturity spectrum as inflation and growth expectations rose. As we suggested in our 3rd Quarter review, those positive bond returns we had experienced got dinged a bit before the year was even up.

A New Year is always a time to reflect and to set new goals for the future. As 2016 has reminded us, crystal balls rarely work. Patiently allocating your investments and having the discipline to stay the course is a proven strategy over the long-term. Often times, we are frustrated with how markets overreact to events or surprised at how overly optimistic investors can become. Over time, however, the free flow of capital is pretty efficient and markets do a fairly good job of pricing in economic realities. While more information is available today through all forms of social media, tempting investors to predict the future and abandon investing principals, we will continue to diversify portfolios using a math-based approach to understanding risk and allocate capital in order to help our clients meet their objectives. While we don’t know what 2017 holds, we are optimistic about the future and will continue to take our responsibility as stewards of your capital with the highest regard.

Happy New Year!

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 11, 2017, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Bridgeworth, LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks.

International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments.

The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

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