2016 began as 2015 ended with oil prices and stock prices falling. Oil (WTI Crude Oil) began 2016 at $37.13 a barrel and bottomed on February 11th at $26.21, a decline of 29% in just six weeks. The S&P 500 began the year at 2044 and fell to 1829 by February 11th (yes, the same day oil bottomed), a decline of 11 %. Fortunately, both the oil market and the stock market stabilized quickly and both had reached their beginning of the year levels by the second week of March.
The referendum in Great Britain in June 2016 whether or not Great Britain would remain in the European Union or vote to exit was viewed as either a solidifier of the EU or the first step to its demise. All polls showed a major advantage to the stay vote, but as we would find out more than once in 2016, pollsters did not have the pulse of the voters. The citizens in Great Britain voted against the establishment, against the recommendation of their Prime Minister, and against staying in the European Union. The stock market sold off 6% in two days, but then recovered fully within three days, to finish up just over 4% year-to-date through June 30.
SUMMER INTO EARLY FALL
After the BREXIT sell-off and fast recovery, the summer proved to be a pretty uneventful and stable period in the market. However, just after summer, the U.S. Stock Market seemed concerned about the upcoming Presidential and Congressional elections, and fell about 3% from the middle of September through the end of October. One of the most surprising occurrences during this period was the dramatic move in interest rates. The 10 Year U.S. Treasury note, which was 1.74% on October 21, would rise some 30% in the next three weeks and would peak at 2.6% by December 15th. This sudden, sharp increase in interest rates sent bonds reeling and we saw the aggregate bond index returns more than cut in half from year-to-date September 30th levels. We also saw Municipal (tax-free) bonds lose 3-4% of their value in just over a month.
ELECTION & THE POST-ELECTION RALLY
The election of 2016, which was supposed to be a Clinton victory, turned out to be a Trump surprise. Once again, the pollsters got it wrong. Trump seized on the anti-establishment vote and it resonated in suburban America. The only thing possibly more surprising than the election results was the stock market’s reaction. Conventional wisdom prior to the election was that if Trump did somehow win that the market would experience a huge sell-off due to the uncertainty that would follow. However, in a year that conventional wisdom was just plain wrong, rather than a market meltdown, what ensued after the election in November was dubbed the Trump rally. The S&P 500 gained 5% through the end of year and finished 2016 with double digit returns. The markets seemed to shrug off the uncertainty of an unconventional President instead focusing on a platform of the repeal of the Affordable Care Act, comprehensive corporate and individual tax reform (which would include some sort of overseas reduced tax rate to bring back profits left overseas to avoid U.S. taxation), some relaxation of the regulatory environment and a massive Infrastructure Spending bill.
The market is anticipating that some or all of these could give the U.S. economy the jolt it needs to get back to the 3% and over GDP growth that has eluded our economy for so long. It remains to be seen if the Republican controlled Congress and Trump Presidency can deliver what they have set out to do. If they can get some or all of these things implemented, we could see the kind of growth we haven’t seen in some time. However, particularly the tax reform and repeal of Affordable Care are not easy fixes and will need to be done with care in order to avoid the solution being worse than the problem you are trying to fix. We are cautiously optimistic heading into 2017.
Tom Reynolds, CPA & Matt Reynolds CPA, CFP® Co-Managing Partners, CRA Financial
Francis C. Thomas CPA, PFS, Investment Advisor
Robert T. Martin, CFA, CFP®, Investment Advisor
This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.