The stock market opened the year in a “risk-off” mode over fears of global growth slowing, falling oil prices, and a U.S. corporate earnings recession. By mid-February equities were down more than 10%. Although markets rebounded through the spring, the negative sentiment and volatility persisted for much of the first half. A quiet summer vacation brought a sigh of relief for financial markets until political uncertainty took center stage, wiping out nearly all of the year’s gains heading into the Presidential vote. Then everything changed. With the unexpected election of Donald J. Trump, the “risk-on” euphoria emerged with a vengeance and markets surged into year-end.

Key themes from the fourth quarter 

Trump Bump

The 4th Quarter, much like 2016, can be broken into two parts; before and after the U.S. election. U.S. markets followed Donald Trump’s victory with a surprise of their own. On election night, early indicators of a Trump victory pushed overnight markets down over 5% before quickly rebounding the next day. Financial markets continued the rally into year end, with the S&P 500, Dow, NASDAQ, and Russell 2000 setting new all-time highs. The S&P 500 index (SPY) was up +3.95% for the quarter with the early beneficiaries of a Trump presidency (Financial, Energy, and Industrial sectors) leading the way. Stocks (S&P 500) finished up +12% for the year.

Rate Shock

In the two weeks following the election, the 10 Year Treasury jumped from 1.7% to 2.3%; a spike whose magnitude and speed hadn’t been seen since November 2001. The increase in rates had a negative impact on most income related investments represented by the Bloomberg US Aggregate Bond Index (AGG) which dropped -3.1% over the quarter and returned +2.4% for the year.

Hope or Reality?

The fourth quarter saw an improvement in economic data. Consumer sentiment also improved as investors appeared to lock onto hopes that lower taxes, infrastructure spending, and the end of Government gridlock would deliver increasing economic growth. Additionally, the Federal Reserve pointed to the uptick in economic growth statistics when it chose to raise short term interest rates in December, the first and only increase in 2016.

Where do we go from here?

Trump’s election was significant and has considerably shifted investors’ expectations regarding regulatory and fiscal policy. With the likelihood of lower taxes for both individuals and companies, reduced regulations, and potential infrastructure spending, markets have shifted to a pro-growth bias. While we are mindful equity values are historically elevated, valuations alone do not present an immediate danger. Viewed in the context of economic growth and modest inflation, we believe the stage is set for further market gains in 2017.
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