-Lao Tzu. A 6th century BC Chinese philosopher
2016 was the Chinese year of the monkey. Monkeys throwing darts may have been more successful than pollsters in 2016 prognostications. Most pollsters whiffed on the two major elections in the western world. After getting the Brexit vote wrong in June, most also missed the Trump election victory in November.
Those few investors who were right on Brexit and Trump, probably got the market wrong. Conventional wisdom was both Brexit and a Trump win would cause a market sell-off. And so they did – but not for long. U.S stocks dropped 6% in the two trading days following the Brexit vote, but gained most of it back in following three days. Dow futures plunged more than 800 points on election night as the Trump win began to unfold. However, by market close on Wednesday, the Dow gained 257 points and the Trump rally was on for U.S. stocks.
Most U.S. stocks indexes were up big in the fourth quarter. But foreign stocks were largely flat, and bonds lost money. The Dow, with a heavy weighting of financial and energy stocks, posted a 9.7% gain for the quarter, the S&P 500 gained 4.2%. The Russell 2000 small company index gained 9.4%. However, the MSCI EAFE Foreign Index lost 0.6% and the Barclay’s Aggregate Bond Index lost 3.4%.
So, what’s going to happen in 2017?
The Bulls Are Saying: We are entering the ninth year of economic expansion, making this the fourth longest since 1900. Recessions are usually blamed for the death of a bull market. However, conventional wisdom is expecting continued economic growth based on the new administration’s intent to lower taxes, roll back regulations, and spend on infrastructure projects.
The Bears Are Saying: This bull market has been driven by an era of low interest rates, which appears to be ending. The Fed raised short term rates in December of 2016 for only the second time since 2008. Based on improved economic conditions, the Fed has forecasted three rate hikes in 2017.
2017 is the Chinese year of the Rooster. No one knows if the financial markets in 2017 will deliver a year to crow about, and we choose not to predict. “He who lives by the crystal ball soon learns to eat ground glass.” – Edgar R. Fiedler.
In the 70 years since the end of WWII the stock market has experienced 14 bear markets, an average of once every 5 years. These bear markets have seen stocks decline an average of 30%. Each of these bear markets have been followed by new stock market highs.