2016 was quite a ride for investors

January 10, 2017 Categories: Portfolio Corner
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2016 in review

Capital markets treated investors pretty well in 2016. A hypothetical balanced index portfolio returned 7.7% for the year, exceeding expectations of many “experts” going into the year. Given concerns about global growth and historically low interest rates, it was not unusual to see projections for a diversified portfolio producing low single digits or even flat returns for the year. Returns of 7% to 8% turned out to be a pleasant reward.

Hypothetical balanced portfolios were driven by the asset class returns displayed in the exhibit below. At first blush, it appeared to be a fairly benign year, with all major asset classes posting a positive return for 2016. However, those who paid attention know that the ride actually resembled a roller coaster more than a carousel.

2016 returns

Difficult start to year

Almost all equity markets and diversifiers such as REITs, infrastructure and commodities took hits in the first six weeks of the year due to global growth concerns, falling energy prices and geopolitical issues. U.S. small cap stocks, in particular, had a tough start to the year. They posted one of their worst January returns on record (-8.8%) and continued their downward trajectory through mid-February when they hit a -15% year-to-date return. Investment grade fixed income (Bloomberg Barclays U.S. Aggregate Bond Index) was the lone bright spot as a flight to quality pushed government interest rates lower and boosted bond prices.

Come mid-February, sentiment toward the global economy began to improve, as did energy prices, and risk assets started to rebound. After an initial February “pop,” stocks gradually worked themselves back towards start of year prices by summer. Some markets, such as emerging market stocks, came back even faster and were soon leading global market results.

Brexit vote

The surprise Brexit vote of July caused markets to retreat and give back some of their recent gains. The uncertainty around the impact of the U.K. voting to leave the European Union spooked investors. Another flight to quality occurred as interest rates were pushed to lows for the year, bonds soared and equities dropped. International developed and emerging markets were hit the hardest, but all equity markets fell. However, market participants proved resilient and soon seemed less concerned over the Brexit fall-out and stocks began recovering across the board.

Fall elections

Heading into the fall political elections, status quo was the expected outcome. As the actual elections approached (in particular, the November 8 U.S. presidential election, to a lesser extent the Italian Referendum the first week of December) the status quo appeared to be less of a lock. Markets got nervous as a Trump presidential administration was seen as a wild card, and markets tend to dislike uncertainty. Stock markets paused and pulled back going into the election. When Trump won, futures markets reacted harshly negative before the U.S. market opened, but it has been all positive since. U.S. stocks rallied through the end of the year, as did non-U.S. stocks in Europe and Asia. This wasn’t as apparent to U.S. investors as a strong U.S. dollar rally muted the return that they received.

The one area that did not benefit from the November elections was the bond market. Increased speculation about improving economic conditions, inflation, and rising rates caused the bond market to give back much of its 2016 gains. The fourth quarter return of the Bloomberg Barclays U.S. Aggregate Bond Index was its worst return since the third quarter of 1981. The Bond Index was up over 6% in mid-July, but limped home to finish the year at 2.6%.

The Bottom Line

Investors who started 2016 expecting modest portfolio returns should be pleasantly surprised by the actual calendar-year results. The first six weeks of the year – among the worst in history – had many concerned investors flashing back to difficult times of the past. Markets corrected soon, but not without having to contend with geopolitical landmines such as high profile votes that ended up going against expectations. Contrary to many pundits’ expectations, markets took each unexpected electoral outcome in stride. While it may have been tempting to anticipate or react to these events through portfolio moves, the possibility of getting whip sawed was high: Diversified and disciplined investors seemed to come out pretty well on the other end.

Disclosures:

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall.  When interest rates are at low levels there is risk that a sustained rise in interest rates may cause losses to the price of bonds. Bond investors should carefully consider these risks such as interest rate, credit, repurchase and reverse repurchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage backed securities, especially mortgage backed securities with exposure to sub-prime mortgages. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries.  When interest rates are at low levels there is risk that a sustained rise in interest rates may cause losses to the price of bonds.

Global, International and Emerging markets return may be significantly affected by political or economic conditions and regulatory requirements in a particular country. Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation. Such securities may be less liquid and more volatile. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and political systems with less stability than in more developed countries.

Investments in infrastructure-related companies have greater exposure to adverse economic, financial, regulatory, and political risks, including, governmental regulations. Global securities may be significantly affected by political or economic conditions and regulatory requirements in a particular country.

Commodities may have greater volatility than traditional securities. The value of commodities may be affected by changes in overall market movements, changes in interest rates or sectors affecting a particular industry or commodity, and international economic, political and regulatory developments.

Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks. Investments in international markets can involve risks of currency fluctuation, political and economic instability, different accounting standards, and foreign taxation.

Indexes are unmanaged and cannot be invested in directly. Index performance does not include fees and expenses an investor would normally incur when investing in a mutual fund. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.

Russell 2000® Index: Measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

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Russell Developed Large Cap Index: Offers investors access to the large-cap segment of the developed equity universe. Constructed to provide a comprehensive and unbiased barometer for the large-cap segment of this market and is completely reconstituted annually to accurately reflect the changes in the market over time.

Russell Developed ex-U.S. Large Cap Index: Offers investors access to the large-cap segment of the developed equity universe, excluding companies assigned to the U.S. Constructed to provide a comprehensive and unbiased barometer for this market segment and is completely reconstituted annually to accurately reflect the changes in the market over time.

The S&P Global Infrastructure Index: Provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.

Bloomberg Barclays Global High-Yield Index: An index which provides a broad-based measure of the global high-yield fixed income markets. The Global High-Yield Index represents that union of the U.S. High-Yield, Pan-European High-Yield, U.S. Emerging Markets High-Yield, CMBS High-Yield, and Pan-European Emerging Markets High-Yield Indices.

FTSE EPRA/NAREIT Developed Index: A global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets.

Russell Emerging Markets Index: Measures the performance of the investable securities in emerging countries globally. Constructed to provide a comprehensive and unbiased barometer for this market segment and is completely reconstituted annually to accurately reflect the changes in the market over time.

Bloomberg Barclays U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Barclays Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index).

JPM EMBI Plus Bond Index: Tracks total returns for traded external debt instruments in the emerging markets.

Bloomberg Commodity Index Total Return: Composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as “rolling” a futures position.

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RIFIS: 18219

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