The 4th quarter 2016 was full of market changing news and events. Donald Trump was elected. OPEC reached agreement on limiting oil production. The Federal Reserve raised interest rates by ¼ of a percent. Collectively, these events helped propel US stocks higher from their already lofty peak. The US stock market responded positively to Trump’s election, anticipating that the promise of lowering taxes and reducing regulation will give a boost to the economy and corporate profits. Indeed, US stocks continue to outperform all other asset classes in the 4th quarter. US stocks were up 4.2% while every other asset class (e.g. International developed, emerging markets, real estate, bonds) declined. For the year, US stocks grew at 12.7% compared to 5% for International Developed stocks, 11.6% for emerging markets, 6.7% for US REITS and 3.1% for Global REITS.
Within these classes an important phenomena occurred: value stocks vastly outperformed growth stocks, the first time this growth differential has occurred to any significant extent since 2009. In the 4th quarter, US Large Cap value stocks outperformed growth stocks, 17.3% vs 7.0%. For US Small Caps, value exceeded growth stocks a whopping 31.7% to 11.3%. This significant return differential occurred in International Developed and Emerging Stocks as well. Value stocks are beginning to catch up after several years of underperforming compared to their growth stock peers.
The watchword for the economy and markets for the coming year is uncertainty. In the US, there have been few specifics details given to various declarations President elect Trump has made in the realm of trade, healthcare, deregulation and government spending. Theoretically a Republican President and Congress bent on cutting taxes and business deregulation should be good for the economy and profits; however significant constraints exists, including rising inflation, rising interest rates and increasing government deficits. Economists generally are anticipating some marginal increases in GDP this year from 1.6% in 2016 to the low 2% range in 2017. The same uncertainty exists for the international economy as well. Will Trump’s trade pronouncements spark a global trade war and therefore reduce global GDP? Will oil prices continue their general upward trend thereby benefitting many emerging markets? Will the European Union hold together and muddle through their slow economic recovery?
In uncertain times like these, it is even more difficult to try to divine which asset class will outperform the others. Such uncertainty should encourage investors to stick to the tried and true strategy of maintaining a diversified portfolio in order to reap the benefits of some stocks rising and others falling. CMP regularly reviews and rebalances your portfolio to ensure that your investments are positioned to maximize returns while minimizing risks.