At the close of the last quarter I forewarned, “As markets enter the home stretch of 2016, expect the unexpected”. That comment seems prescient as it relates to the market and politics over the past several months. The 4th quarter started down but the S&P 500 Index rallied to end up at 3.83%. The Barclays Bond Aggregate Index was down -2.99% for the quarter as yields increased forcing bond prices down. Lastly, the MSCI EAFE Index, which tracks international markets, was down a mere 0.72%, as foreign markets and economies lag behind the U.S.
The year brought a little bit of everything, starting off with a 10% drop in the stock market that will be notable as the worst first two weeks ever. The price of oil then took a dive from a high of $100 per barrel in late 2014 to a low of $30 in early 2016. It subsequently rebounded to $50 per barrel as a result of a reduction in supply. England’s vote to leave the European Union (Brexit) roiled markets and world politics in June. Although predicting election is more of an art than a science, no one anticipated November’s outcome. The stock markets immediate climb following the election added to the drama. Alas, the Federal Reserve raised interest rates at the end of 2016 by another 0.25%, citing improved confidence in the economy. None of the above were expected nor projected results for the year.
Going forward our greatest challenge is in positioning portfolios in the face of potential uncertainty of the market risk and return. For the first time in years, inflation has reared its ugly head and is slowly creeping up from 1.61% in 2014 to 2.44% in 2016. Additionally, an aging global population, slower productivity gains and elevated stock prices should collectively keep returns near lower bounds. Of course, the biggest caveat to that, is how the new presidential administration and its economic policies are perceived and executed. Going forward we will be faithful to our mantra of looking for value and investing in companies that have a history of slowly and steadily increasing their dividends. This approach insures steady income to the portfolios that provides a cushion to soften market fluctuations. Lastly, if inflation continues to increase an allocation to Treasury Inflation Protection Securities may be a prudent decision.