Current Thinking

4th Quarter 2016 Economic & Market Review

Global Environment and the Federal Reserve
The biggest news for the 4th quarter was the result of the U.S. presidential election as Donald Trump captured a surprising victory at the polls. The equity markets liked the outcome and reacted quite favorably to what is expected to be a pro-growth administration. From an economic perspective, the U.S. economy appears to be on solid ground with a number of different indicators trending positively. These include: an improving employment and housing market picture; a high level of consumer confidence (propelled recently by the U.S. election); steady energy price; and record level U.S. stock markets. Q3 GDP was reported as 3.5%, higher than both its prior estimate (3.2%) and the 1.4% number of Q2. The U.S. economy added an average of 176,000 jobs each month in Q4 and the unemployment rate remained low (4.6%). Meanwhile, the Federal Open Market Committee raised the target range for the fed funds rate by 25 basis points, to 0.50%-0.75%, and indicated additional tightening over the next year.

Equity Markets

Equity markets were mixed in Q4 with the U.S. meaningfully outpacing its non-U.S counterparts. U.S. small-cap stocks led the way as the Russell 2000 surged 8.8% for the quarter, finishing 2016 with a 21.3% return. Although mid-cap and large-cap U.S. equities lagged small-caps, they were quite strong for both the quarter and calendar year; the Russell Midcap Index gained 3.2% and 13.8% for the quarter and year, respectively, while the S&P 500 Index advanced 3.8% and 12.0% for the same periods. 2016 saw a huge disparity in value vs growth stocks across the market capitalization spectrum with value stocks dominating growth by 10% to 20% depending on market capitalization. Meanwhile, non-U.S. equity markets continued to struggle, producing negative returns for the quarter. The MSCI EAFE Index, representative of developed non-U.S. equities, declined 0.7% for Q4 (+1.0% for 2016) and the MSCI Emerging Markets Index fell 4.2% (+11.2%).

Fixed-Income Markets

Interest rates continued to increase across the U.S. Treasury yield curve with the 10-year U.S. Treasury note closing the year at 2.45% (up from 1.60% on 9/30). In addition, the 3-month t-bill ended 2016 at 0.51%, up from 0.29% on 9/30. The Bloomberg Barclays U.S. Aggregate Bond Index (representing investment grade U.S. bonds) declined 3.0% in Q4, closing 2016 with a 2.7% gain. In addition, the Bloomberg Barclays Long Credit Index plummeted 5.4%, but was still up 10.2% for the year. High yield bonds, on the other hand, continued strong with the Bloomberg Barclays U.S. Aggregate Corporate High Yield Index returning 1.8% for Q4 (17.1% in 2016).

About the Author

Michael Randazzo

As a Senior Investment Strategist, Mike oversees all aspects of portfolio management, including investment policy development, asset allocation policy, investment manager evaluation and capital markets strategy. On an ongoing basis, he also tracks performance measurement and analysis for our clients.


No comments.

Leave a Reply

Required fields are marked *