Market Update for the Quarter Ending December 31, 2016

Strong end to the year for financial markets

All three major indices were up in December, capping off positive quarterly and annual returns. The Dow Jones Industrial Average led the way, gaining 3.44 percent, 8.66 percent, and 16.50 percent for the month, quarter, and year, respectively. The S&P 500 Index had lower but strong returns of 1.98 percent, 3.82 percent, and 11.96 percent for the same time frames, while the Nasdaq notched lower gains of 1.19 percent, 1.66 percent, and 8.87 percent for the periods. Technical factors were positive, as all three indices stayed above their 200-day moving averages throughout December.

In addition to the encouraging year-end market results, companies resumed earnings growth. Per FactSet, as of December 30, the estimated fourth-quarter year-over-year earnings growth rate for the S&P 500 stood at 3.2 percent.

International markets had a more mixed year than their U.S. counterparts. The MSCI EAFE Index was up 3.42 percent in December but was down 0.71 percent for the quarter and only posted a modest 1-percent gain for the year. The MSCI Emerging Markets Index rose slightly in December, 0.29 percent, though it was down 4.08 percent for the quarter despite returning a robust 11.60 percent for the year. Technicals for both indices were weak in December.

The Bloomberg Barclays U.S. Aggregate Bond Index was up 0.14 percent in December, lost 2.98 percent for the quarter on a rise in interest rates, and gained just 2.65 percent for the year. The high-yield bond market fared better, with the Bloomberg Barclays U.S. Corporate High Yield Index up 1.85 percent, 1.75 percent, and 17.13 percent for the month, quarter, and year, respectively.

Economic data looks promising

For the second year in a row, the Federal Reserve raised interest rates in December. This action, combined with forecasts for three rate hikes in 2017, signaled the Federal Open Market Committee’s belief that the economy is strong enough to withstand a gradual normalization of interest rates.

Positive economic news in December came from increased consumer confidence. Both major confidence measures rose more than expected, with the Conference Board Index reaching its highest level since 2001 (see Figure 1).

Figure 1. Conference Board Consumer Confidence, 2002−2016

Core durable goods orders were up more than expected in November. Additionally, the ISM Manufacturing and Non-Manufacturing indices continued to rise.

November employment figures, reported in early December, were strong, with 178,000 jobs added. The headline unemployment rate dropped to a post-recession 4.6-percent low.

Existing and new home sales rose more than expected in November, with existing home sales climbing to their highest level since 2007. Builder confidence also improved significantly, reaching levels not seen since the mid-2000s.

Despite the good news, there were disappointments. Personal income growth, personal spending, and retail sales all came in below expectations. Moreover, wage growth declined slightly.

Another negative data point came from industrial production, which decreased more than expected. The big driver of this decline was lower-than-forecast utility production due to unseasonably warm weather.

Political uncertainty domestically and abroad

Heading into 2017, there is a great deal of political uncertainty around the globe. In the U.S., the election of Donald J. Trump and a Republican Congress has catalyzed stock market outperformance, as investors anticipate reductions in corporate tax levels and the deregulation of many industries. But against this backdrop is the potential for the renegotiation of trade relationships, which could hinder U.S. business.

In Europe, the emerging Italian banking crisis is placing increasing pressure on the European Union; in Asia, as China’s economy slows, questions about its ability to keep growing are becoming more urgent.

Risks remain but U.S. outlook is positive

The U.S. economy continues to expand at a healthy pace with solid underlying fundamentals. Undoubtedly much attention will be given to political events in 2017, and potential risks may become reality, but the U.S. remains one of the most attractive investment destinations worldwide.

Although short-term volatility may occur, the right path for investors is to stay committed to a strategy. A well-diversified portfolio with a time horizon that matches investment goals is typically the best way to achieve desired financial aims.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

Sara Romaine is a financial advisor located at Blue Hills Wealth Management, 300 Crown Colony Drive, Quincy MA 02169. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 617-471-6800 or sara@bluehillswm.com.