2016 4th Quarter Economic Update – 2016 Market Review

2016 market reviewHappy New Year! We hope that you had a wonderful and relaxing holiday season after such an exciting and eventful year. According to a recent Associated Press poll, the top story of 2016 was the US Presidential election. It was a contentious election that consumed Americans and much of the world for most of the year. The election  and Donald Trump’s election showed that American voters are anti-establishment and were focused on jobs and protecting Medicare, Social Security and infrastructure.

President-Elect Trump is sworn into office on January 20th and he, supported by a Republican-controlled Congress, has an aggressive agenda for 2017. He plans to repeal 60-70% of President Obama’s legacy, placing the future of the Affordable Care Act and environmental regulations at risk. Trump plans to pull the US out of the Trans-Pacific Partnership. Tax reform is a top priority to attempt to reach and sustain a 3-4% GDP during Trump’s presidential term. His administration thinks this is achievable…we shall see. Tax reform will involve simplifying the tax code from 7 brackets to 3 brackets and reducing the corporate tax rate to 15-20%, which could  result in a more favorable and competitive business environment for American companies, promoting growth. There is concern about the use of tariffs, aka “border-adjusted” taxes, to make this happen. Dodd-Frank legislation is also on Trump’s radar, which he feels is way too complicated and restrictive, preventing banks from lending to businesses and hampering growth.

President Obama, the supposed lame duck President, will be leaving office in a blaze of glory. As a result of Russian interference in the US elections, which Trump largely dismissed, Obama expelled 35 Russian diplomats in retaliation. He is moving prisoners from Guantanamo in an effort to have this prison ultimately shut down. He has been accused of being covertly responsible for a late December UN vote that condemned Israeli settlements in the West Bank. The Obama administration finalized a regulation to protect the funding of family planning providers like Planned Parenthood. Lastly, using the 1906 Antiquities Act, Obama grabbed an additional 1.65 million acres of US land for conservation efforts, bringing the total to 553 million acres repurposed for conservation and protection efforts.

There were other noteworthy events in 2016. Brexit, which although seemed like a fabulous idea for Britons at the time, has now cast a gloomy shadow on the long-term economic prospects of the United Kingdom without the support of the European Union. This vote and the US election results showed a growing data divide between the perception of facts, polls and forecasts and the reality of the outcomes. Ipsos Mori, in its annual Perils of Perception series wrote, “objective facts are less influential in shaping public opinion than appeals to emotion and personal belief”. Cyber security threats, including the hacking of a billion Yahoo accounts, ISIS and terrorism also made headlines in 2016.

Although 2016 was a wild year for voters, it was a relatively placid one for investors, who seemed to respond to these political events with indifference or easy optimism. Global markets tend to favor predictability and stability and it is difficult to quantify the Brexit vote or the election of Donald Trump as either of these. The S&P 500 ended the year with a 9.5% gain and the elusive Dow 20,000 was ever so close. Bonds were stagnant and yields remained low in 2016, though.

After a long bull market in US stocks and a bond rally that has lasted decades, 2017  is shaping up to be an unpredictable year for global markets. Investment returns may be dictated by political policy to some extent. Will Donald Trump and his business leader-concentrated administration be able to push through the reform that he promised? When will Brexit happen and what will it ultimately look like? There are other elections to take place in France and Germany that may change the political landscape of the European Union. The US Federal Reserve is expected to raise rates a few times this year. Investors around the world will be watching closely because if 2016 proved anything, it’s that anything can happen.

Warm regards,