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Investor Discussions - Q4|2016 Commentary

Wealth & Pension Services Group
William Kring, CFP, AIF - Chief Investment Officer

Q4|2016 Commentary

The Quarter In Brief

Two events strongly influenced U.S. and foreign financial markets in the fourth quarter – one unexpected by many, the other widely anticipated. Neither of them particularly upset investors. Donald Trump’s win in the presidential election led to a rally on Wall Street, and the Federal Reserve’s December interest rate hike was taken in stride, even as our central bank’s monetary policy stood out globally for its hawkishness. The S&P 500 ended up gaining 3.25% in three months. The United Kingdom scheduled its Brexit, and OPEC elected to trim oil output for the first time in eight years. Oil rallied, and so did the dollar; precious metals retreated. The housing sector showed strength even as mortgage rates ascended. On the whole, the most-watched U.S. economic indicators were encouraging.1

Domestic Economic Health 

On December 14, the Federal Reserve announced its second quarter-point rate hike in two years. The federal funds rate was reset at the 0.50-0.75% range, and the central bank’s latest dot-plot forecast showed three planned rate moves in 2017 instead of the previously projected two. Fed officials emphasized that oncoming tightening will be “gradual.”2

As Q4 ended, consumer confidence indices looked very impressive. The Conference Board’s monthly index was well over the 100 mark at 109.4 by November, and then it pushed further north to 113.0 in December. The University of Michigan’s household sentiment gauge sat at 87.2 in October, then rose to 93.8 in November and 98.2 for December.4,5  

Consumer spending accelerated 0.4% in October, but only half that in November. Consumer incomes rose 0.5% in October, and then flattened a month after that. Core retail sales (minus car and gasoline purchases) followed a similar pattern: up 0.5% in October and 0.2% in November. (Perhaps the December numbers will show more upside.)7  

As energy costs rose, the annualized gain in the headline Producer Price Index went from 0.8% in October to 1.3% in November. (By November, the core PPI showed a 1.6% yearly gain.) Consumer inflation remained beneath the Federal Reserve’s 2% target. As of November, the Consumer Price Index was up but 1.7% in 12 months, with the core CPI up 2.1%. The Federal Reserve’s core PCE price index was 1.8% higher year-over-year in October, but that number declined to 1.6% in November.7  

Global Economic Health

The eurozone economy had expanded only 0.3% in Q3, and by November, euro area yearly inflation was still at 0.6%, with six member nations (among them Greece and Ireland) experiencing year-over-year consumer price deflation. Populist movements in France, Germany, and Italy gained traction, most notably Italy’s Five Star Movement. Italian Prime Minister Matteo Renzi resigned in November after his party’s attempt at constitutional reform was voted down by the electorate; the Five Star Movement has vowed to hold a national vote on whether or not Italy should stay in the European Union if it assumes power in 2018.8,9  

Teresa May, the United Kingdom’s prime minister, announced her country would make its Brexit from the E.U. as early as the summer of 2019, by invoking Article 50 of the Lisbon Treaty no later than the end of March. May expected the U.K. to have a full role in E.U. policymaking through 2019.            

Looking Back at the Numbers...




S & P









Looking Forward

The fourth-quarter performances, noted in the accompanying table, left the big three U.S. equity indices nicely positive, with international developed equities providing only minimal gains (partly due to a strong US dollar) and bonds finally sagging under the start of interest rate hikes.

Investors are entering the first quarter with a good deal of optimism, but also with an awareness that anything could happen. Wall Street has been bullish on the incoming Trump administration, and that confidence will likely continue as it begins to shape policy in Washington. At the same time, market participants are keeping a cautious eye on the Fed, the strong dollar, and the possibility of a stock bubble inflated by euphoria. Economic signals have looked much better of late than they did a year ago, and the stock market appears to be on much sturdier legs than it was at the beginning of 2016, when it fell precipitously. With the earnings recession having faded away, perhaps the market will get a boost this next earnings season that will lift the Dow above 20,000. For this best-case scenario to emerge, domestic and global belief in the new president and his administration needs to be strong and sustained, and geopolitical events from overseas need to be tolerable for the bulls. It will be an interesting first quarter.  

William Kring, CFP®, AIF®
Chief Investment Officer


This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The SSE Composite Index is an index of all stocks (A and B shares) that are traded at the Shanghai Stock Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The PHLX Oil Service Sector Index (OSX) is a price weighted index composed of companies involved in the oil services sector. The S&P GSCI is the first major investable commodity index. The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the


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