“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge. “i

In this season of traditions, resolutions and predictions for the New Year are especially popular ones.  But for anyone making (or reading) 2017 forecasts, we have a question – don’t you remember 2016?  Brexit?  Trump?  The Cubs?  It was the year that made virtually every professional prognosticator look pathetic.  Having lived through 2016, how can anyone make predictions for 2017 with a straight face unless it’s the result of an uncontrollable character flaw?
Indeed, last year’s surprises covered many parts of our lives – politics, sports, weather, and of course, the markets. Concerning finance, the year started in turmoil with global capital markets falling (U.S. stocks fell over 10% into February marking it as the worst start to a year for the stock markets).  Then, remarkably, the U.S. stock market regained these losses before the end of the 1st quarter.
Of course, this was followed by Brexit in June with its 2-day plunge and then yet another historic recovery.  This bounce in stocks led to an important breakout above a two-year trading range which continued into the U.S. elections.  The market gyrations and volatility on election night as well as Donald Trump’s victory were not expected.  After the election, U.S. equity markets had a much stronger tone and rallied into year end.
Here are the year-to-date returns for the major averages.  Also, we are including the move from the election which shows how much of the year’s performance happened in a six-week period.
YTD 2016            Since election
Dow Jones Industrial Ave.                  +13.4%                  +7.8%
S&P 500                                              +9.5%                    +4.6%
Nasdaq Composite                              +7.5%                    +3.6%
Russell 2000                                        +19.5%                  +13.5
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividend.
Below is a graph of the S&P 500’s 2016 journey broken down by month.ii  The graph’s line is green in positive months and red in negative months.  Also, the monthly returns are at the bottom of each month.  The graph illustrates the year’s big moves we mentioned above.  It shows how dramatic the January/February drop was.  Further, the amazing Brexit move stands out at the end of June and, finally, it is easy to spot the trading around the election and the climb into mid-December.
The fixed income markets had some volatility as well. Bonds had a strong first half of 2016, some headwinds in the 3rd quarter, and a bad 4th quarter.  For the buy and hold investor who doesn’t follow the developments day-to-day or even month-to-month, it may have appeared to be another boring year.  The 10-year treasury note started 2016 at 2.25% and ended the year at 2.45%.  Pretty innocent on the surface.  But this masks some volatility during the year.
At the beginning of 2016, the markets were expecting 3 or 4 rate increases by the Fed.  Instead, as the economy lagged, rate hike expectations were pushed further into the future and accommodative monetary policies continued.  This helped bonds as yields fell (higher bond prices) and by the beginning of July the yield had dropped to 1.38%.  The yield moved higher in the 3rd quarter as the job market was strong along with some other positive data.  From the election to mid-December, yields exploded higher (bond prices plunged) as the markets anticipated higher economic growth under a Trump administration as well as larger fiscal deficits.  On a total return basis, the 10-year note lost 3.69% in 2016.
Crude oil spiked 45% in 2016 while natural gas climbed even higher, up 59%.  Both commodities started from depressed levels after imploding in 2015.  Gold had a strong year into September but declined badly in the 4th quarter as the dollar strengthened and interest rates moved higher (both bad for gold).  For the year, it was up 8.4%.
2016 was a good one for the dollar as the index (vs. a basket of currencies) rose 3%.  Against the major currencies, the greenback was up 3.2% against the euro, down 2.7% vs. the Japanese yen, and up 7% against the Chinese yuan.  Some bigger notable moves included a 19% rise against the British pound and a 14% decline vs. the Russian ruble.
Turning to international stock markets, Brazil spiked 39% and Canada climbed 17%.  Within Europe, Germany and France were up mid-single digits.  Japan was flat and China fell 12%.
Below is a diagram of 2016 returns for various global asset classes.iii
Let’s hope that the Trump presidency has a better start to the New Year than Mariah Carey.  While the optimism surrounding the economy and stock market should carry into the new year, expectations are lofty.  Tax reform, regulation reductions, and infrastructure programs are assumed to implemented quickly and easily.  In general, the consensus is that Washington turns into an efficient machine that will support the economy while still effectively addressing society’s problems.  At the risk of making a 2017 prediction, that’s not going to happen.
And how long the Trump honeymoon lasts is a critical question concerning the rally in equities.  Traders have become so smitten with the president-elect that stocks charts are transformed into billboards supporting the new administration as the one below was entitled “Make America Great Again”.iv
Unmet expectations and implementation delays could result in disappointment which could trigger a correction.  Of course, it’s unlikely that the markets would wait for an actual misstep to occur, but rather, some selling might take place before the new administration learns where the bathrooms are.
History offers some thoughts on President-elect Trump’s 2017.  Since 1928, there have been four times that a Republican replaced a Democratic President.  In each of these four examples, the S&P 500 declined at least 6.5% for the new president’s first year.v  Maybe a statistical coincidence or maybe a correlation.  Nevertheless, something to keep in mind as the term begins with so much enthusiasm and optimism.
While it will be tough to compete with 2016, this year could offer its own fireworks and surprises.  There are important elections in Europe (Germany and France) and we know how they changed things last year.  International relationships and trade policies will be altered which will have unintended consequences.  U.S. monetary policy should be tighter than recent years and, who knows, we may even get a budget out of Washington (something that hasn’t happened in years).
At this time last year, no one could have predicted what eventually happened in 2016.  It is equally impossible to accurately foresee 2017.  Whatever happens, there will setbacks as well as opportunities.  Here’s hoping a lot of the latter and few of the former.
Jeffrey J. Kerr, CFA

Kerr Financial Group
Kildare Asset Management
168 Water Street
Binghamton, NY 13901

i Lao Tzu, 6th Century BC Chinese Poet
ii Bespoke Invesment Group, The Bespoke Report 2017
iii Deutsche Bank, Bloomberg Finance LP, Mark-it Group
iv Stocktwits, Mike DiBari
v Bespoke Invesment Group, The Bespoke Report 2017
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