Money look back, look ahead
It was a wild year for markets to say the least. With a severe January correction, a Brexit surprise and Donald Trump’s unexpected victory, there was lots of upheaval.
Yet, stocks finished the year strong, with most developed and developing markets seeing good gains in 2016, especially Canada and the U.S. What exactly drove the markets? Let’s look back at the year that was to find out. Politics It was a year of surprising populist surges.
The most memorable market events of 2016 were political ones as well.
Brexit sent shock waves through global equities and pushed global bond yields to all-time lows.
Better-trending economic data, however, ensured the equity sell-off was short-lived.
Even quicker was the market recovery following Donald Trump’s surprise win in the U.S. presidential election.
As Trump’s victory became apparent on election night, S&P 500 futures plunged over five per cent.
But, they reversed course before midnight in anticipation of stimulus spending, tax cuts and widespread deregulation.
The Dow’s per cent gain in the five weeks after Trump’s victory is the biggest surge following any U.S. presidential election. Canada leads the pack It was Canada’s year to shine, finishing 2016 as the best-performing developed market in the world.
That’s a reversal from 2015, when it was one of the worst.
The change was thanks to the recovery in oil prices, which bottomed at around $27 a barrel in February and then doubled by year end.
With resource stocks representing a third of our market, it’s no surprise the S&P/TSX handily outperformed the S&P 500.
This occurred even as Canada’s economy scratched along at roughly one per cent GDP growth.
Canada’s energy sector sub-index rose by more than 50 per cent, while the materials sector, which includes gold and other mining operations, also contributed to the gains, climbing by 28 per cent. Record-breaking gains in America It was another strong year for American markets, with the Dow Jones Industrial Average nearly breaking 20,000 for the first time in history, and the S&P 500 surpassing its previous highs.
However, the year began with a significant correction as all major indices posted negative double-digit returns by early February over fears an economic slowdown in China would draw the world into recession.
Almost as dramatically, those losses were erased before the end of March thanks to improving economic indicators and signs of stabilizing Chinese GDP growth.
Investors who bought U.S. equities in February when the Dow dipped as low as 15,660 were rewarded with a gain of close to 30 per cent by year end. Crude and currency These two are no longer joined at the hip. Crude and the loonie often move in tandem, but that began to break down in the second half of 2016.
As crude plunged in January the loonie dropped below 69 cents U.S.
Both then reversed and climbed until May, when the Canadian dollar began to drift from a high of 80 cents U.S. back down to 74 cents by year end.
Oil rose by $10 in the same period, boosted by November’s OPEC agreement to cut production. Why the divergence? In part, because interest rates are rising faster in the U.S. than here.
An improving oil outlook could mitigate the impact on the loonie. Goodbye bull market With low rates now starting to climb to a more normal level, the total returns available from bonds has shrunk to near zero.
In December, the U.S. Federal Reserve increased its short-term rate by 0.25 per cent to 0.75 per cent, while its 10-year treasury yield, which is more representative of market rates, climbed from 1.3 per cent in July to 2.5 per cent in December.
Higher rates have caused bonds to sell off worldwide, and have also negatively impacted prices of bond proxies like utilities and real estate investment trusts.
However, they have helped bank and insurance stocks, which have soared since. Profit bounce back Coming into 2016, corporate profits in both Canada and the U.S. had been stagnant or declining for several quarters.
This is problematic, as equity returns are ultimately driven by earnings growth.
Fortunately, the S&P 500 posted yearover-year growth again in the third quarter of 2016 after five consecutive year-over-year down quarters.
In Canada, corporate profits fell for eight straight quarters through Q3.
However, what’s often missed is the absolute level of earnings had settled earlier, with data showing U.S. corporate earnings bottoming out in Q1.
Improving earnings performance helped revive the economic outlook, while expectations around Trump’s seemingly pro-growth policies have heightened expectations of continued profit growth. Stay the course If last year has taught investors anything, it’s the importance of sticking to the plan.
There were several times in 2016 where investor patience was tested.
But, after every decline, the market rebounded.
With continued concerns around global GDP growth and world politics, markets could remain volatile in 2017.
But, as we learned in 2016, when the corrections do come, don’t panic, and, if anything, a market dip may offer investors an opportunity to buy.
It’s impossible to perfectly time markets, so even if you sell before a bottom, you’ll likely miss getting in before the upswing.
Stay the course in good times and bad.