2016 was a year that will go down in history as very unexpected. Stock markets around the world had the worst start to the year in modern history. Our markets started the first 6 weeks of the year down 10% – 15%, only to roundtrip a month later. No sooner than when we started to put the recession fears behind us, we started focusing on the British vote to remove themselves from the European Union, now referred to as ‘Brexit.’ If you listened to the talking heads, the world was never going to be the same and a deep recession would ensue if Britain voted to exit the EU. Not only did that not happen, but like we said at the time, returning control and governance to the local (country) level could be a good thing. Although the British pound has depreciated significantly since Brexit, their economy has held up pretty well, especially when considering the “common wisdom” of a no vote at the time.
When finally we were are able to put that in our rear view mirror, we then turned our focus onto our Presidential election. With Donald Trump winning the Republican nomination and Hillary Clinton winning the Democrat nomination, common wisdom was clearly on the side that Hillary would win and become the first woman President in US history. What could go wrong? Just like Brexit, the ‘elites’ and talking heads were apparently not paying attention to how people were really feeling – and as we now know, Donald Trump won (at least the Electoral College).
On the night of the election, as it became more of a possibility that Trump could win, the stock market futures began wildly selling off, and at one point were down more than 800 points on the Dow Jones, and about 100 points on the S&P 500. We received more than a few phone calls and emails that night asking what to expect in the morning and our answer then is the same as it is now, let’s wait and see how things progress. The market did open the next morning down, but quickly reversed and ended finishing up over 200 points on the Dow, and it eventually made its way to new all-time highs within the month.
We had three major market moving events last year, each of which should have (according to conventional wisdom) sent the markets into a downward spiral that would have taken months or years from which to recover. Not that we’re out of the woods as far as the prospect of bad policy decisions, but the world’s economies seem to be perking up and showing signs of real growth.
Our model kept us moderately conservative through the late spring and into summer before becoming fully invested in stocks on August 31st. While we missed out on some returns last year, our guiding principles of conserve assets when risk appears high, and redeploy cash as it (risk) abates, were followed to the letter. This process will work most of the time, but there will be times, like the spring of last year, when we get whipsawed. Still though, our model continues to outpace our benchmark for the 3-year, 5-year and since inception time periods.
Looking ahead to 2017, we find it interesting to peek at Byron Wien’s 10 surprises for the coming year. Not because he’s always right, but because it’s fun to go back and see what was right and wrong for the year (click here to see his 2016 predictions). Now in his 32nd year of forecasting, he occasionally comes up with some far out predictions, while other years are a bit more down the middle. There’s a possibility that numbers 1 and 6 may end up being the biggest surprises on his list. As always, we will look back in a year and see how he did.
Finally, from an economic standpoint, we expect world economies to continue to improve and it is quite likely will see global growth above 3% for 2017. We could see the markets moving higher with growth rates as well as a potential for increased earnings, both stimulated by lower tax rates. As we all know, you can’t cut taxes and spend more on infrastructure without either cutting spending somewhere else, or hoping higher growth rates bail you out. We rarely consider hope a strategy. We shall see how this year goes.
As always, we encourage you to call or email if you wish to have a longer discussion surrounding these or any topics – and certainly we look forward to speaking with you. If you’d like to share this note with friends or family, please do.