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Lessons from 2016 and What to Expect in 2017

The year 2016 turned out to be a spectacular year for lesson learning and reminders. Unfortunately, some lessons are not readily transparent. Capital Markets University (CMU) turned out to be an insightful resource for clients and investors throughout the year. The information distributed in CMU white papers are chronicled on our website.

Let’s review 2016 quarter-by-quarter. In the first quarter, you may (or may not) recall that the S&P 500 stock market index was well into negative territory by February. In fact, on February 11 the index was -13.30%1. To some investors, this was a strong indication of how the rest of the year would go. Some decided to sell in anticipation of further declines. Those who read my CMU white paper written during this time titled Stock Market Declines. Normal?2received a different message. In this publication, I presented four key points:

  1. Review and adjust (if needed) your expectations.
  2. Make volatility your friend, not your foe.
  3. Keep in mind that headlines change rapidly, and
  4. Be selective with your informational resources. 

This publication was followed up a few weeks later with CMU white paper titled Living Through a Market Decline3. Here, I delivered eight points of insight as to what a market decline may look and feel like.

  1. The news is bad, bad, bad.
  2. You may feel disenchanted with your advisor.
  3. Gold advertisements will be everywhere.
  4. You will want it to end, immediately!
  5. You may feel embarrassment.
  6. You may change how you perceive risk.
  7. You may lose sight of your goals, and
  8. You may need to change your information sources. 

The first quarter was emotionally taxing for many investors. 

The second quarter brought shocking global headlines. Who can forget BREXIT? The voters of Great Britain delivered a surprising blow to the European Union (EU) by opting to leave. The media was in a frenzy. We were told how bad this was going to be for Great Britain, the EU, global economies and yes, the stock market. Once again, CMU readers received a different message. This came by way of my white paper titled Round One Goes to Sovereinty4. In contrast to what we were hearing and reading about the future implications of the vote to leave, I pointed out the positive aspects, of which I believe there are many. The following is an excerpt from paragraph four, “Today’s headlines may include attention grabbing phrases such as BREXIT Bombshell, Black Friday and Global Stocks in a Tailspin but I don’t believe it can be concluded that global demand for products and services will decline because the people of Great Britain have chosen independence from a centralized decision making union. Yes, the UK will be responsible for making trade deals on their own now but this also means that they will be in charge of their own fate and accountable unto themselves. The constituents have chosen a path of sovereignty. I believe over time Britain (and possibly other countries) will do well in determining their own role in the global economy”. I wasn’t the only person with this point of view, a majority of UK voters believe it too! 

While financial journalists seemingly never fall short of producing big headlines, the third quarter was relatively noneventful. Stock prices were mostly flat and volatility was lower than the first half of the year. Sure, we were nearing the end of a long presidential campaign but, nonetheless, market prices experienced a welcome calmness. 

The day finally arrived. Tuesday, November 8th, election day. A day that couldn’t come soon enough for some and others wished would never have happened. This single event dominated the (global) news of the final quarter of 2016. Friendships were strained, family members argued as tempers flared over the candidate of choice. We were compelled to hold a public forum titled Investing and Politics due to the attention and focus on the election. Financial Advisor, Alan Carroll, illustrated the historical relationship between the stock market and political parties. The lesson he shared from the past is that market prices are highly correlated to corporate earnings and there is no clear advantage to having a Republican or Democrat in the White House. I believe the capital markets are about as apolitical as a system can be. 

Major stock market indexes delivered significant price increases from election day to the end of the year. Some have dubbed this the “Trump Bump”. We do not know how the market indexes would have responded to a Hillary Clinton victory and to speculate would offer no value to investors. Regardless of the credit given for the increase, investors welcomed the strong performance. It left some, however, dazed and confused when receiving their statements. Expectations of large personal gains, driven by daily reminders of major stock market index price movements, were high. The least diversified major index, the Dow Jones Industrial Average (DJIA), increased nearly 7.80%5 from election day through year end. The S&P 500 index delivered far less at approximately 4.64%6. The Dow Jones Global Total Stock Market Index is the most diversified major index and reflects most all publicly traded companies worldwide (and may be more appropriate as a benchmark for globally diversified investors) increased 3.00%7. Media outlets provide stock market index information as a public service but the information can be misleading. As you can see from the figures above, depending on which major market index you track, performance figures can be significantly different. In addition, many investors hold bonds in their portfolios to provide balance and reduce volatility. This asset class is not accounted for in the major market indexes. While major market indexes were breaking records, bond prices fell sharply in the fourth quarter. Once again, CMU was there to deliver timely information with white paper titled The Stock Market is not YOUR benchmark8. The intent of this white paper was to explain to investors what was happening in the capital markets universe and align expectations with actual portfolio holdings. Readers were informed of the pitfalls of using stock market indexes as benchmarks and were advised to focus on the most important benchmark of all, your personal and individual financial goals. After all, a portfolio should be constructed around goals, risk tolerances and time frames; not stock market indexes. 

A well-diversified, balanced portfolio likely met or slightly exceeded performance expectations in 2016. Like previous years, headlines changed rapidly and market prices were volatile. We should expect more of the same in 2017. 

The new year is likely to bring new concerns. We can expect negative news to be more contagious than positive. This will be amplified by the growing use of the internet and social media as an information source. The following are things I would expect in 2017:

  • Experts will try to explain stock price movements by attaching each day’s results to a current event.
  • Some will make price or performance predictions for the year (a practice that has proven to be futile).
  • As in the past, some investors will lose sight of their long-term goals and become wrapped up in near term events.
  • Major market indexes will continue to demonstrate its proclivity for volatility. Many long-term investors will stay informed with current events while at the same time remaining focused on their long-term goals.
  • Capital Markets University will continue its efforts in educating and informing by producing timely white papers. 

Your financial goals are important and deserving of high quality information. As you consider your priorities in 2017, be selective with your resources. There has never been a time where information (and misinformation) has been disseminated so rapidly and it’s likely to get worse. 

-Rick O’Dell

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