A review of investing in 2016 can be summed up in a couple of words: Stunning surprises.
US Equities had the worst start to a calendar year in modern history, down over 10% in January and early February. Following a rebound in anticipation of Britain voting to stay in the European Union (EU), stocks fell rapidly and bonds appreciated in reaction to the vote to leave the EU, commonly known as “Brexit”. In the run-up to the US election, stocks rebounded again on the anticipation of an “almost certain” Democratic party victory. The result, perhaps the most stunning surprise in generations, was greatly feared to lead stock prices much lower. Instead, prices shot up through the end of the year.
Emerging markets stocks were the best performing asset class until the US election and still produced returns close to US stocks for the year. Developed foreign nations returns trailed the US somewhat as the dollar’s continued strength weighed down profits when converted to US currency. The perception of a stronger US economy and along with higher interest rates attracted investment in the US at the end of the year.
About a year ago, we reduced our allocation to Real Estate and Commodities. Those dollars generally went in favor of small and value-type US stocks. That worked out well as those funds returned over 25% for the year; most of the gain occurred after the election in November.
Bond prices went on a roller coaster ride throughout the year and the 10-year US Treasury yield ended just a little above where it started the year. In the meantime, the yield went to its lowest ever, 1.37% in July. Rates rose quickly after the US election.
The Federal Reserve raised short-term interest rates again this December. They also indicated a plan to raise rates again in 2017, which the market had been expecting.
Please review our annual "Winners" chart showing the "best" asset class for one-year and five-year periods.
Winners Chart (click here)