Surprise is the best way to summarize 2016. We had many surprises throughout the year. As we talk about surprise, who could forget Ralph Kramden of the Honeymooners walking into his apartment in anticipation of a surprise party for him grabbing his chest and saying ”Oh what a surprise” only to find out there was no surprise party? We’ve had to grab our collective chests a few times this year.
To start off the year in January the stock market greeted us with one of the worst January’s in the history of the market. S&P was down 5.5% and NASDQ down nearly 8%. This continued into February and we saw the oil prices surprisingly drop all the way down to $26.19 per barrel. Morgan Stanley even thought it could go down to $17 per barrel.
As we moved into the middle of the year the United Kingdom decided to vote to see if they should stay in the European Union. This was also known as the Brexit referendum. Less than five hours before the results became clear, betting markets gave “Remain” an 88 percent chance to win. Actually, there was a huge turnout as almost 72% of the people voted and “Leave” won by 52% to 48%. The markets around the world held their hearts and prices dropped in all major markets. “Oh what a surprise”!
Next was our country’s turn for a surprise. The US presidential elections were very contentious for many months. Relying on opinion polls, election forecasters had Secretary of State Clinton chances of winning anywhere from 70% to as high as 99%. With few exceptions, the final round of public polling showed Clinton with a lead of 1 to 7 percentage points in the national popular vote. As we all knew by 2:00 am, Donald Trump was the surprise of the year, and named the winner of the 2016 US presidential election. This surprised our nation as well as all of the nations around the world. The initial surprise brought the S&P futures down around 6% only to surprisingly rally and go up 1.1% that day. Each day we are seeing headline news that the market is hitting new highs.
Perhaps the bigger surprise, that is not getting a lot of press, is the bond market. More than $1 trillion have been wiped out across global bond markets worldwide. We have seen the 10 year treasury yields go from around 1.8% to over 2.5%* in a very short period of time. That’s almost a 40% increase! As interest rates increase, the value of bonds go down, all other things being equal. In a balanced portfolio, the bond losses have dragged down the equity gains.
With the new administration about to come in, next year could be filled with surprises. So what do you do? Stick to your disciplines. Make sure you’re properly allocated based on your tolerance for risk and liquidity needs. We are currently cautiously optimistic with our eyes wide open. We will see if it’s “Bang Zoom to the Moon” or “Pow! Right in the Kisser”.
*Information provided by Factset