Twenty-sixteen will be remembered for both its political and financial milestones and as a year that tested the resiliency of investors around the globe. The year started with capital market volatility, but the script then flipped, with most major market indexes look to end the year in the black.
Q1: Equities Fall, Oil
Crashes A crash in oil prices, a global slowdown (including talk of a U.S. recession), currency devaluations, worldwide banking concerns and global central bank policies all captured the attention of investors during the first six weeks of 2016, resulting in an 11% fall in the S&P 500. A rebound in oil prices and continued monetary easing by central banks sparked a turnaround in U.S. equities, helping the S&P 500 finished Q1 up 1.35%.
A more than 30-year fixed income bull market continued as central banks kept interest rates at historic lows, and record amounts of sovereign debt traded at negative yields. Global uncertainty led investors to seek safety, driving yields lower as the total return for the Barclays Global Aggregate index posted a positive 5.90% return during the first quarter.
Q2: Volatility Triumphant
Market volatility hit an apex during the second quarter as Britain voted to exit the European Union. Global markets tumbled immediately following the referendum, costing investors more than $3 trillion in the two days immediately after the vote and the British pound collapsed to a 31-year low. After the initial shock and concern set in, cooler heads prevailed as swift political change and monetary policies helped calm fears.
Investors' confidence increased as it became clearer that the Brexit fallout would have a muted immediate impact on the global economy. Improved economic data, along with a continued accommodative monetary policy by the Federal Reserve, lead to a "risk on" environment.
Q3 and Q4: Election and the 'Trump Trade'
Markets zigged and zagged as one of the most contentious U.S. Presidential elections in more than a century neared. Prior to the election, equity and fixed income markets alike feared the uncertainty of a Trump presidency. The "Trump Trade" followed as U.S. equity markets hit record highs, while fixed income yields spiked, placing doubt in the longevity of the fixed income bull market.
As 2016 winds down, expectations are high that the Federal Reserve will increase the federal funds rate, which looks to be already priced into the market. Will the "Trump Trade" continue for the remainder of the year, providing a very strong finish to a watershed year? We'll see.
And in 2017?
The resiliency of investors will be challenged again in 2017 as many questions—both political and financial—remain.
The coming year will mark the first time since 2006 when a Republican (George W. Bush) roamed the oval office while a Republican majority controlled both chambers of Congress.
