Money Smarts: A Year Of Improbable Profits

Well, 2016 is over and despite all the trauma it ended up being a very profitable year for most investors.

The S&P/TSX Composite was up 17.8 per cent entering the year’s final week, making it one the top performing indexes in the world. In New York, the Dow, S&P 500, and Nasdaq all established new records in December. As of Dec. 26, the Dow was ahead 14.4 per cent for the year, the S&P 500 had gained 10.8 per cent, and the Nasdaq Composite was up 9.1 per cent.

These numbers seemed highly improbable back in January-February. North American stock markets got off to their worst start in history. The Dow began the year at 17,590.66 and proceeded to go into a swan dive, falling all the way to 15,503.01 in intra-day trading on Feb. 11. That was a loss of almost 12 per cent in six weeks, making it a full-scale correction. The other North American indexes showed a similar pattern.

But that was the nadir for the year. The markets started to recover in the second half of February and, with an occasional time-out, the rebound continued for the rest of 2016.

Looking back now, let’s review the main financial stories of the year and their impact on the performance of the stock and bond markets.

The interest rate moratorium. On Dec. 16, 2015 the U.S. Federal Reserve Board raised its key lending rate for the first time since 2006. It was only a quarter-point hike but it was seen as the start of series of moves that would take the rate to 1 per cent or higher over the course of 2016.

The stock market does not like rising rates and the Fed move plus the expectation of what was to follow was one of the factors that depressed share prices in the early part of the year. But the expected additional hikes never came. Economic indicators continued to be weak and job creation numbers were below expectations, staying the Fed’s hand. As the months passed without any further moves, it became apparent that there was a de facto moratorium on rate increases.

That contributed to a strong stock market rally, especially in interest-sensitive securities. The bond market also shot up, as rates fell to historically low levels. In many European countries, high-quality sovereign bonds saw their yields fall into negative territory.

That phase is now over. The Fed raised its rate by a quarter-point in December and three more increases are expected in 2017. Bond prices have slumped and the shares of interest-sensitive stocks like REITs and utilities have sold off in anticipation.

This leaves us at about the same point as in mid-December 2015, with everyone anticipating more hikes to come. But this time around, the markets appear to have priced in those moves.

Brexit. The news that Great Britain had voted to leave the European Community in a June 23 referendum stunned the world. The result was completely unexpected, as the polls had projected a fairly easy victory for the Remain side (not the only time the pollsters were wrong this year). The Dow fell more than 5 per cent in the days immediately following the vote and most markets around the world followed suit.

But the decline was short-lived. By the end of the month the Dow was almost back to its pre-vote levels and by mid-July it was in record territory. Traders decided that, shocking though the vote was, nothing tangible was going to happen for at least a couple of years. Even now, more than six months later, Britain has not acted to trigger Article 50 of the Lisbon Treaty, which is the first step in opening departure negotiations. Now a British court has ruled that Parliament must first give approval before Article 50 is invoked. This saga is likely to go on for some time.

Trump’s victory. Almost everyone, including me, thought the stock market would plunge if Donald Trump won the election. Like so much else in this turbulent year, we were all wrong. Instead, we have experienced what has now become known as the Trump Bump. On Election Day, the Dow closed at 18,332.70. When the markets closed for the Christmas holiday it was at 19,933.81, a gain of 8.7 per cent.

Investors took a close look at Mr. Trump’s policies and decided a lot of them would be good for business. They liked his tax cuts, his plans for deregulating the financial sector, his infrastructure spending plan, and his intention to cut red tape. They didn’t like his protectionist trade program but they have put their heads in the sand on that one, as least so far.

OPEC. The final big market mover of the year was the Nov. 30 agreement by OPEC to cut output by 1.2 million barrels a day starting in 2017. With another 600,000 barrel cut promised by non-OPEC nations, mainly Russia, that would be a whopping 1.8 million barrels a day of supply gone from the system.

I have doubts the real cuts will be anywhere near that level. However, the news provided a big boost for oil and gas stocks.

Not one of these stories could have been predicted a year ago at this time. All had a significant influence on the markets in 2016. That raises the question: What stories might we be writing about at this time next year? I’ll wager that trade is right up near the top of that list.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to