Global equity markets rose 1.3% during the fourth quarter, as measured by the MSCI ACWI Index, and outperformed the -7.1% return for the Bloomberg Barclays Global Aggregate Bond Index. Stocks declined early in the quarter amid uncertainty over the US Presidential Election and central bank policy. Trump’s surprise election victory lifted stocks, boosted by his initiatives favoring lower taxes, less regulation, and new infrastructure spending. Global bonds declined as the Federal Reserve raised rates, and foreign currencies weakened versus the US dollar. For the full year 2016, global equities returned 8.5% while global bonds returned 2.1%.
The S&P 500® Index of US stocks returned 3.8% for the quarter, outdistancing global equities. The financial sector rallied following the presidential election with banking stocks expected to benefit from less-restrictive regulations and higher interest rates. Energy stocks were lifted by higher oil prices in view of OPEC’s efforts to reduce global oil production. Growth stocks were held back by smaller gains in the technology and health care sectors, with uncertainty over foreign trade policy and a potential rollback of the Affordable Care Act. Dividend stocks were mixed as rising rates were a headwind for more defensive sectors such as utilities and real estate.
The MSCI EAFE® Index of international developed stocks trailed US stocks with a -0.7% return for the quarter, as weakness in foreign currencies versus the US dollar detracted from returns. International stocks outperformed the US market in local currency terms. European and Japanese stocks benefited from expectations for stronger economic growth and supportive policy from central banks. The broader Asian region was weighed down by economic uncertainty in China. Emerging markets were mixed as China was down, but Russian stocks rose with the recovery in oil prices and expectation for improved US relations.
In fixed income, the Bloomberg Barclays US Aggregate Bond Index returned -3.0% during the quarter. Bond yields rose in view of the Federal Reserve’s decision to raise rates in December. Most sectors were down with larger declines seen among government bonds and longer maturities. High-yield bonds were more resilient to the rise in rates and gained as credit spreads tightened. International developed-market bonds were weighed down by weakness in foreign currencies versus the US dollar. Emerging market bonds were down less, benefiting from the rise in oil prices and improved outlook for commodity-producing countries.
The US economy expanded 3.5% during the third quarter of 2016, as GDP rose at its fastest pace in two years. This was improved from 1.4% in the second quarter, with consumer spending and exports both large contributors to growth. Early estimates from the Federal Reserve of Atlanta indicate that GDP grew 2.9% in the fourth quarter, supported by positive data on construction spending and manufacturing. Corporate earnings for S&P 500 companies are expected to rise 3.2% in the fourth quarter, making the second straight quarter of year-over-year gains. The Federal Open Market Committee (FOMC) projected that the US economy will grow 2.1% in 2017.
The Federal Reserve increased short-term interest rates at the December FOMC meeting – only the second increase in more than ten years. The move was based on increased confidence in the economy and expectations for a strengthening job market. The unemployment rate decreased to 4.6% in November, with the FOMC expecting a decline to 4.5% in 2017. The Consumer Price Index (CPI) inflation rate rose 1.7% for the 12-month period through November, lifted by higher housing and gasoline prices. In view of the positive economic data, the FOMC projected three rate hikes in 2017.
The end of 2016 provided a stark contrast to how the year started. Entering 2016, the Federal Reserve was expected to raise rates four times during the year, based on their assessment of an improving US economy. However, stocks declined sharply in January and into mid-February in response to weak economic reports, the slowdown in China, and declining oil prices. With the uncertain economic backdrop, the Federal Reserve paused on raising rates until December and the economy improved. US stocks received a boost following the US election and ended the year on a positive note with the S&P 500 recording a 12.0% gain for the year.
Given the relative strength of US stocks in recent years, investors may question the value of globally diversified portfolios. While US stocks have outperformed the international market (as measured by the MSCI ACWI ex US Index) each of the last four years, history suggests that leadership can shift over time. For example, foreign stocks outperformed US stocks for six straight years from 2002 to 2007. Notably, valuations on international stocks are currently cheaper in a historical context than their US counterparts. International markets could also benefit from continued support from global central banks as policies diverge from the US Federal Reserve.
Following a year of unexpected outcomes that included the Brexit vote and the election victory of Donald Trump, 2017 will likely see continued bouts of market volatility. With uncertainty around new US presidential policies and the prospect of further rate increases by the Federal Reserve, the case for broad-based global diversification remains as strong as ever. Allocations to tactical and diversifying strategies can help diversify portfolio risk and provide benefits in periods of weakness for traditional asset classes. The future is uncertain and the prudent path is to be strategically diversified to counter a range of outcomes.
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Summit Group of Virginia
This material was prepared by Asset Mark and does not necessarily represent the views of the presenting party, nor Ameritas Investment Corp. (AIC). Asset Mark is not affiliated with the presenting party or AIC. This material represents an assessment of the market environment at a specific point in time and is not intended to predict future results. The performance mentioned herein is past performance and is not indicative of future results. All information is gathered from sources believed to be reliable; however we make no representation as to its completeness or accuracy. Market indices are unmanaged and cannot be invested into directly. Neither the presenter nor AIC are providing tax or legal advice. Please consult your tax advisor or attorney regarding your situation.
 Index returns from FactSet
 Source: Bureau of Economic Analysis
 Source: FactSet
 Source: Bureau of Labor Statistics