2016 Asset Class Performance
Source: US Large Cap: S&P 500, US Small Cap: Russell 2000, International: MSCI EAFE, Emerging Markets: MSCI Emerging Markets, Real Estate: Dow Jones US Select REIT, Energy: S&P 500 Select Energy Sector, Bonds: Barclays US Aggregate Bond
2016 was yet another year that helps make the case that markets are not predictable over the short run. The market got off to its worst start ever with slowing global growth and plummeting energy prices. Both were short lived as unemployment dropped to 4.8% by the election, and continued to drop to its present level of 4.6%, well below the Fed’s target. Low unemployment leads to higher wages and a revived economy. At the same time, OPEC worked to raise energy prices and the energy markets rallied (as we expected per our January 20th, 2016 newsletter). With U.S. small cap stocks and international stocks down 15 to 20% plus in early 2016, we took the opportunity, where appropriate, to add to these asset classes. Both are up 20 to 40% from their lows. U.S. stocks quickly recovered from their slow start, and really took off after the election as the market quickly priced in lower corporate taxes, the likelihood that corporations would be able to bring back overseas money at a low tax rate, and lower regulatory costs. International stocks recovered as well, but still ended the year flat, which proved quite an accomplishment given the hysteria around Brexit. Within months, all losses were recovered and the index moved to positive territory, something we expected would happen per our letter the day of the vote. The U.S. has now outperformed large international stocks for three straight years, a feat that has never been sustained. Emerging markets stocks had a solid year, posting 10.66% gains, and on a pure valuation basis, remain the most attractive asset class. We continue to believe in the emerging markets as an asset class. Real estate and bonds pulled back substantially after the election as the markets quickly priced in higher interest rates. While we don’t have great expectations for the bond market, for many of our clients, they remain an important part of the long term strategy. Over the long run, higher rates actually boost bond returns. In the short run, they can meet short-term income needs, reduce volatility and provide dry powder for buying opportunities.
Perhaps the greatest lesson of 2016 is, as we have said in our letters On Volatility, and The Coming Correction, and Market Timing is Dead, that markets are simply not predictable over the short run. Over the long run, they are quite predictable. Nothing has ever blown up a well diversified portfolio, other than the investor himself. 2016, as with every year, had its share of casualties. The disciplined investor participated in the various market returns, purchased when the opportunity presented itself, and took advantage of any tax savings opportunities.
Happy New Year from all of us at Creative!