Fourth Quarter 2016 Review
Our team of investment professionals aptly referred to 2016 as the “roller coaster” year. Stocks began the year with a modest sell-off yet finished strong. Fixed income securities rallied during the first half of 2016 only to come under pressure as the year came to a close. On balance, 2016 rewarded investors who stayed the course with respectable investment results.
Clearly, the Trump presidential victory surprised the financial markets with equity markets rallying and bond prices falling. Expectations are now high for the new administration to deliver on policies that will spur economic growth, such as increased fiscal spending, easing of unfriendly business regulations, and reducing corporate and personal income tax rates.
During the fourth quarter of 2016, we saw economic data improve, interest rates rise, and consumer and business confidence increase. In the economic section, George Mokrzan, Director of Economics, expects U.S. GDP growth, inflation, the 10 year Treasury yield, and the Fed Funds rate to all move higher in 2017 from 2016’s levels. However, he points out that risks to his interest rate outlook are to the upside and are largely dependent on the net stimulatory impact of potential fiscal policy change by the new administration and Congress.
Thanks to a surprise election outcome that resulted in a sudden turn in investor sentiment, U.S. Treasury yields abruptly moved higher during Q4 2016. Kirk Mentzer, Director of Fixed Income, notes in the Fixed Income section that 2016 was a bumpy ride for investors as the 10 year Treasury began the year at 2.27%, dropped to 1.36%, and finished the year at 2.45% for a net change of 18 basis points.
Kirk suggests that fixed income investors in 2017 adjust their strategy. Rather than ‘searching for safe yields”, investors should focus on “safe capital strategies” given our expectation for higher yields in 2017. He presents several strategies to adjust portfolios without too much disruption.
Randy Hare, Director of Equity Research, observes in the Equity Markets section that U.S. stocks, as measured by the S&P 500, posted four quarters of remarkably consistent performance to finish 2016 up 11.95%. However, sector performance results varied as investors rotated sectors quarter to quarter as investment trends failed to be long-lived.
Randy notes that the end of the S&P 500 earnings recession in 2016 will be a positive stimulus for stock performance in 2017. He outlines several factors we will focus on throughout 2017. Overall, it appears as though the tailwinds outweigh the headwinds for the U.S. equity markets which should provide a positive environment for U.S. equity investors.
Here are our macroeconomic thoughts:
- The U.S. economy is forecast to continue to grow at a moderate pace of 2.2% in 2017, up from slow estimated growth of 1.6% in 2016.
- After average annual inflation of nearly 0% in 2015 and just over 1% in 2016, inflation is forecast to broaden and widen to 2.4% in 2017.
- Along with rising inflation and somewhat stronger economic growth, the 10-year Treasury yield is projected to continue on a rising trend that probably reaches 3.0% by year-end.
- The Federal Reserve is forecast to raise the Fed Funds rate target 2 times in 2017.
With respect to the Fed and interest rates, our view is that the risks for the Fed Funds rate target and overall market interest rates are to the upside, which will largely depend on the net stimulatory impact of potential fiscal policy change by the new administration and Congress.
For additional discussion regarding the U.S. economy, we are pleased to provide the Huntington Wealth and Investment Management Economic Outlook publication upon request.