Despite Wall Street’s worst start to a year ever, the U.S. stock market bounced back and posted solid gains in 2016, with small stocks leading the charge higher in a rally that gained steam after Donald Trump was elected president on Nov. 8. However, the markets ended 2016 with a thud! The final 3 days of trading were negative for all three indices marking a 3 day slide for the first time since November 4, just prior to the election. The final numbers for 2016: Dow +13.4%, NASDAQ +7.5%, S&P 500 + 9.5%.
The big winner in 2016 was the small-company Russell 2000 stock index, which has gained 20%. The small-cap index got a huge lift after Election Day; surging more than 14% as investors began to price in what they believe will be a better outlook for smaller, domestically focused U.S. companies under a Trump administration.
One highlight of 2016 was the Dow’s late-year flirtation with the 20,000 milestone. Despite coming within 13 points of Dow 20,000 on December 20, the 120-year-old stock gauge finished the final day of trading at 19,762.60, or 238 points shy of Dow 20K.
The momentum gained after the election began to run out Monday December 19 as the market turned choppy for Trump trades but good for fixed income and bond proxies — which affords us a chance to step back and examine what could upend the reflation trade that accelerated since November 8.
First, the effects of a unified government tend to produce larger deficits. Most of the focus has been on the opposition Trump could face from within his party if he pursues budget-busting measures, which could result in less fiscal stimulus than markets are pricing in. Also, the distributional effects of the new administration and Congress’ plans do matter. A deeper budget deficit doesn’t necessarily mean a bigger fiscal impulse, or even a positive one! If policy changes disproportionately benefit upper-income Americans but result in smaller transfers to those who are worse off, this could well be a net drag on economic activity.
Markets are currently in no-man’s land, largely having priced in possible positive impacts of Trump’s potentially stimulative policies, but current economic data is going nowhere fast. A lot of the month-to-month economic data that looked so strong in September and October (which the Fed officially mentioned in its release) suddenly looked just OK in November. Month-to-month retail sales, housing starts, and industrial production, all released this week, faltered some and generally missed expectations. The year-over-year data in these three key reports was less worrisome but certainly don’t indicate a big boom ahead.
There are a lot of hopes for tax cuts, more fiscal stimulus, and less regulation built into current markets, with valuations looking increasingly stretched. I worry, too, that these new policies will take a lot more time to implement than anyone suspects. Meanwhile, the economy is already losing some momentum and interest rates will likely slow housing activity.
What to do:
Stay the course! Double check your allocation, make sure it suits your tolerance, and don’t get cute by trying to trade or time the market. A properly diversified allocation is your best protection for downturns and your best potential if the market continues to rise.
A basic rule of thumb is to take your age and subtract that from 115. Your answer is the suggested starting percentage to have invested in the stock market. The balance is the suggested starting percentage to have in safer investments such as bonds, money market, or stable value. As an example, if you are age 53 then 115 – 53 = 62. A 53 year old person should start with 62% of their portfolio allocation invested in the stock market and the remaining 38% should be in safer investments.
We at WCM celebrate one of our best years ever with strong growth in our client family. We sincerely hope everyone had a happy and prosperous 2016 and we look forward to serving you in 1017!
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