THE YEAR IN BRIEF
After a bearish start, 2016 ended up being a good year for the
bulls. The Dow Jones Industrial Average sold off 6% in January, dropping below
15,500 as investors worried about sinking oil prices and a slowdown in China’s
economic engine. Eleven months later, the blue chips were nearing the 20,000 mark.
Wall Street rode through the market shock brought on by the Brexit, rallied
after Donald Trump’s presidential election victory, and priced in an interest
rate hike by the Federal Reserve. Energy futures saw huge yearly gains. The
housing market maintained its momentum, even as mortgage rates began to
increase. Unemployment declined, consumer confidence grew, and the
manufacturing sector expanded again. Investors awaited 2017 with some optimism.1
DOMESTIC ECONOMIC HEALTH
When it came to GDP, the 2016 trend was upward. The economy
grew but 0.8% in the opening quarter of the year, then 1.4% in Q2, and then
3.5% in Q3. On the downside, real GDP grew only 1.6% in the 12 months ending in
Q3 as a 2.5% year-over-year advance for consumer spending was countered by a
2.7% decline in real gross private investment.2,3
By November, the unemployment rate had fallen to
4.6%, which was 0.4% lower than a year earlier. Fewer Americans were
underemployed as well, as the U-6 jobless rate dipped from 9.9% to 9.3% in that
timeframe. Was the economy nearing full employment? Perhaps. The average wage
had improved 2.5% in 12 months.3,4
Consumer confidence indices improved as the year
progressed. The Conference Board’s key index, maybe the most respected U.S.
confidence barometer, hit 113.7 in December, rising steadily from a 92.4 trough
in May. The University of Michigan’s
consumer sentiment index started the year at 92 in January, hit a 2016 low of
87.2 in October, and then rose to a 2016 high of 98.2 in December (which was
its best reading in nearly 13 years).5,6
Did that confidence translate into greater retail
sales? Yes. The Department of Commerce reported a 3.6% gain for non-food retail
purchases for the 12 months ending in November. That beat the average advance
of the past four years, and trounced the mere 1.0% rise seen in the year ending
in November 2015.7
Annualized inflation rose from the minimal levels
seen in 2015. By November, the Consumer Price Index was up 1.7% year-over-year.
At that same time, the Federal Reserve’s preferred inflation gauge, the core
PCE price index, showed a gain of 1.6% for the 12 months ending in November.
Wholesale inflation, diminished with the slide in commodity prices during 2015,
made a 2016 comeback of sorts. The Producer Price Index advanced 1.3% from
November 2015 to November 2016.3,8
Manufacturing rebounded. In December, the
Institute for Supply Management’s purchasing manager index for the factory
sector rose to a 2-year peak of 54.7 – a great turnaround for a PMI that was
mired below the 50 level in both January and February. (A reading below 50
indicates sector contraction rather than expansion.) As for ISM’s
non-manufacturing PMI, it reached a 13-month high of 57.2 in November, with the
December reading to be released in January.9,10
The Federal Open Market Committee unanimously
voted to raise the key interest rate by a quarter-point in December. That move
took the target range for the federal funds rate to 0.50-0.75%. As the rate
hike was announced, investors saw that the Fed dot-plot forecast included three
rate increases for 2017 rather than two. Wall Street absorbed the news calmly.
During 2016, the Street saw some momentous corporate deals (Bayer bought
Monsanto; AT&T and Time Warner merged; and Anheuser-Busch took over
SABMiller) and a major corporate scandal (Wells Fargo’s admission that its
employees created about 2 million phony deposit and credit card accounts to
meet sales quotas).11,12
GLOBAL ECONOMIC HEALTH
Investment
markets around the world recoiled when the United Kingdom voted to leave the
European Union on June 23, approving the so-called “Brexit.” The Dow dropped
611 points after that surprise, and the pound sterling fell to a 31-year low.
Prime Minister David Cameron resigned after the vote; his replacement, Teresa
May, plans to initiate the Brexit process in 2017. Whether it will be a “hard”
or “soft” Brexit remains to be seen; negotiation may end up preserving some of
the U.K.’s present trade pacts with countries on the continent.1,12
For the first time in eight years, OPEC oil
ministers elected to cut production levels. That November decision was a boon
for Brent and WTI crude prices. Other oil producers subsequently joined the
agreement. Early in 2016, crude prices were hovering near 13-year lows, sending
the economies of Venezuela and Brazil into deep recessions.12
The world’s second-largest economy seemed to
stabilize during 2016. Economists widely predict that China’s 2016 GDP will be
between 6.5-7.0%, not as high as it was earlier in the decade, but still
comparatively strong in the global picture. Downside risks seemed to have
lessened as the year ended – crucially, the Caixin purchasing manager index of
Chinese manufacturers improved a full point to 51.9 in December, nearly a
4-year high.13
Away from America, the planet’s two other
prominent central banks showed no interest in tightening. The European Central
Bank bought bonds all year and decided to extend its quantitative easing plan
through the end of 2017. By March, it had taken its deposit rate down to -0.4%
and reduced its 2016 GDP projection for the euro area from 1.7% to 1.4%.
Battling deflation from yet another angle, the Bank of Japan announced a new
policy focus on long-term interest rates. The BofJ now seeks to steepen the
yield curve to boost bank profits.14
WORLD MARKETS
Looking at the world’s important stock benchmarks, the winners
outnumbered the losers in 2016. Some of the largest yearly gains were seen in
the Americas: in addition to a double-digit rise for the Dow, Canada’s TSX
Composite improved 16.32%; Brazil’s Bovespa, 37.97%; and Argentina’s MERVAL,
44.90%. Mexico’s Bolsa rose 6.20%.15
Even with the Brexit shock, the United Kingdom’s
FTSE 100 added 13.85% for the year. France’s CAC 40 improved just 3.96%;
Germany’s DAX, 6.87%. Spain’s IBEX 35 lost 3.01%. The Russian Micex set the
pace on the continent, advancing 26.76%. Among the Asia-Pacific indices,
Taiwan’s TSE 50 stood out with its 15.26% gain. China’s Shanghai Composite took
a 13.14% fall. In between, Hong Kong’s Hang Seng rose 0.54%; Japan’s Nikkei 225,
0.42%; Australia’s All Ordinaries, 6.57%; South Korea’s KOSPI, 3.06%; and
India’s Sensex, 2.57%. The MSCI World gained 5.32%; the MSCI Emerging Markets,
8.58%. The FTSE Eurofirst 300 lost 1.18%.15,16
COMMODITIES MARKETS
Major energy futures recorded staggeringly large advances in
2016. Natural gas soared 63.78% on the NYMEX; heating oil, 52.49%; and unleaded
gasoline, 29.81%. WTI crude rose 46.12% for the year on its way to a final 2016
close of $53.89.17
Even with a strong greenback and renewed interest
in equities, gold, silver, copper, and platinum pushed higher on the year. Gold
gained 7.18% across 2016 to settle at a COMEX price of $1,152.00 on December
30; silver increased 15.04%, ending the last trading week of 2016 at $15.96.
Platinum futures improved 2.05%, and copper futures, 20.40%. The U.S. Dollar
Index rose 3.63% in 2016. Eyeing crop futures, corn lost 0.36% on the year;
wheat, 11.00%; and cocoa, 31.66%. Soybeans gained 15.78%; coffee, 10.82%;
cotton, 13.82%; and sugar, 30.76%.17,18
REAL ESTATE
The latest available data on year-over-year home buying showed
a very healthy real estate market. The National Association of Realtors
reported that through November, existing home sales had increased 15.4% in 12
months. New home buying, according to the Census Bureau, was up 16.5% in that
same span. The eleventh month of the year found new home sales at their
second-highest level since the end of the Great Recession, and existing homes
moving at a pace unseen since February 2007.19
By raising interest rates a quarter-point, the Fed
did not exactly throw cold water on a hot housing market. Mortgage rates were
already climbing in fall after descending in summer. Comparing Freddie Mac’s
December 31, 2015 and December 29, 2016 Primary Mortgage Market Surveys, a
marked difference in the numbers appears. At the end of 2015, the mean interest
rate on the 30-year FRM was 4.01%; the mean rate on the refinancer’s favorite,
the 15-year FRM, was 3.24%; and, the average rate on the 5/1-year ARM was
3.08%. As 2016 concluded, the average rates looked like this: 30-year FRM,
4.32%; 15-year FRM, 3.55%; 5/1-year ARM, 3.30%.20,21
Zillow said that the median U.S. home value was $192,500
as of November, representing a 6.5% annualized gain. (The median price of a
listed residence was $238,990.) Tighter housing inventory was a factor pushing
home prices north. As of November, the real estate sector had seen overall
year-over-year declines in groundbreaking (6.9%) and building permits (6.6%).22,23
LOOKING BACK…LOOKING FORWARD
The Dow
Jones Industrial Average did not surpass 20,000 in 2016, but it came close,
thanks to a 7.94% gain in the fourth quarter, finishing the year at 19,762.60.
The NASDAQ Composite wrapped up the year at 5,383.12; the S&P 500, at
2,238.83. Small caps had a great 2016 – as investors sensed greater defense and
infrastructure spending just ahead, the Russell 2000 jumped 8.43%
in Q4 to finish 2016 at 1,357.13,
up 19.48% for the year.18
What U.S. index was the top performer of
2016? The PHLX Gold/Silver index, which climbed 74.08% for the year, even while
slipping 16.11% for the fourth quarter. The CBOE VIX “fear index” ended 2016
down at 14.04, taking a 22.90% yearly loss.18
In March, the bull market will turn eight years
old. How long can it keep going? Is it a mega-bull that can run for a decade –
or longer? Maybe. As 2017 gets underway, the mood on Wall Street is essentially
optimistic, with a sense that American companies will benefit from increased
federal and personal spending. Stock values may be elevated, but few analysts have
mentioned the possibility of a recession; few see the current business cycle
peaking this year. Inflation has picked up, and the Fed may respond to it with
the three 2017 rate hikes it has projected; the strong dollar shows no signs of
weakening. So, what kind of headwinds will stocks face? How will investors
react to the Trump administration? How much of its planned financial and tax
code reform will it be able to achieve? As much as investors would like a
crystal ball for 2017, the new year presents major question marks. Last year
taught investors that anything could happen; that lesson should not be
forgotten in 2017. The outlook is still bullish as the year begins,
with the belief that supply will keep rising to meet demand in many economic
sectors. If that holds true, the economy and the stock market may be in for a
very good year.1
Securities offered through First Heartland Capital, Inc. Member FINRA/SIPC
Bogetto & Associates does not provide legal or tax advice. These topics are discussed in conjunction with your CPA, Tax Advisor and Attorney.
This material was prepared by
MarketingPro, Inc., and does not necessarily represent the views of the
presenting party, nor their affiliates. The information herein has been derived
from sources believed to be accurate. Please note - investing involves risk,
and past performance is no guarantee of future results. Investments will
fluctuate and when redeemed may be worth more or less than when originally
invested. This information should not be construed as investment, tax or legal
advice and may not be relied on for the purpose of avoiding any Federal tax
penalty. This is neither a solicitation nor recommendation to purchase or sell
any investment or insurance product or service, and should not be relied upon
as such. Indices do not incur management fees, costs and expenses, and cannot
be invested into directly. All economic and performance data is historical and
not indicative of future results. The Dow Jones Industrial Average is a
price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ
Composite Index is a market-weighted index of all over-the-counter common
stocks traded on the National Association of Securities Dealers Automated
Quotation System. The Standard & Poor's 500 (S&P 500) is a market-cap
weighted index composed of the common stocks of 500 leading companies in
leading industries of the U.S. economy. The Russell 2000 Index measures the
performance of the small-cap segment of the U.S. equity universe. The CBOE
Volatility Index® (VIX®) is a key measure of market expectations of near-term
volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc.
(NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the
“NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®,
and the Pacific Exchange). NYSE Group is a leading provider of securities
listing, trading and market data products and services. The New York Mercantile
Exchange, Inc. (NYMEX) is the world's largest physical commodity futures
exchange and the preeminent trading forum for energy and precious metals, with
trading conducted through two divisions – the NYMEX Division, home to the
energy, platinum, and palladium markets, and the COMEX Division, on which all
other metals trade. The S&P/TSX Composite Index is an index of the stock
(equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as
measured by market capitalization. The Bovespa Index is a gross total return
index weighted by traded volume & is comprised of the most liquid stocks
traded on the Sao Paulo Stock Exchange. The MERVAL Index (MERcado de VALores,
literally Stock Exchange) is the most important index of the Buenos Aires Stock
Exchange. The Mexican Stock Exchange commonly known as Mexican Bolsa, Mexbol,
or BMV, is the only stock exchange in Mexico. The FTSE 100 Index is a share
index of the 100 companies listed on the London Stock Exchange with the highest
market capitalization. The CAC-40 Index is a narrow-based, modified
capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a
Blue Chip stock market index consisting of the 30 major German companies
trading on the Frankfurt Stock Exchange. The IBEX 35 is the benchmark stock
market index of the Bolsa de Madrid, Spain's principal stock exchange. The
MICEX 10 Index (Russian: Индекс ММВБ10) is an unweighted price index that
tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The
SSE Composite Index is an index of all stocks (A shares and B shares) that are
traded at the Shanghai Stock Exchange. The Hang Seng Index is a free
float-adjusted market capitalization-weighted stock market index that is the
main indicator of the overall market performance in Hong Kong. Nikkei 225
(Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The
Nikkei average is the most watched index of Asian stocks. The All Ordinaries
(XAO) is considered a total market barometer for the Australian stock market
and contains the 500 largest ASX-listed companies by way of market
capitalization. The Korea Composite Stock Price Index or KOSPI is the major stock
market index of South Korea, representing all common stocks traded on the Korea
Exchange. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called
the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market
capitalization-weighted stock market index of 30 well-established and
financially sound companies listed on the Bombay Stock Exchange (BSE). The FTSE
Eurofirst 300 measures the performance of Europe's largest 300 companies by
market capitalization and covers 70% of Europe's market cap. The MSCI World
Index is a free-float weighted equity index that includes developed world
markets, and does not include emerging markets. The MSCI Emerging Markets Index
is a float-adjusted market capitalization index consisting of indices in more
than 25 emerging economies. The US Dollar Index measures the performance of the
U.S. dollar against a basket of six currencies. The
CBOE Volatility Index® is a key measure of market expectations of
near-term volatility conveyed by S&P 500 stock index option prices. The PHLX
Gold/Silver Sector Index (XAU) is a capitalization-weighted index composed of
companies involved in the gold or silver mining industry. Additional risks are associated with international investing, such
as currency fluctuations, political and economic instability and differences in
accounting standards. This material represents an assessment of the market
environment at a specific point in time and is not intended to be a forecast of
future events, or a guarantee of future results. MarketingPro, Inc. is not
affiliated with any person or firm that may be providing this information to
you. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional.
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[1/4/17]
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[12/5/16]
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[12/14/16]
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[12/31/16]
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[12/26/16]
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markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [12/30/16]
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[12/30/16]
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[1/3/17]
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