2016 in Review
By: Susan W. Malloy
After the worst start to a year in which we saw the DOW bottom on February 11 at 15,660.18 (down more than 10% and a two-year low) and oil on the same day posting its lowest level since 2003 at $26.21 a barrel, the DOW proceeded to log its best performance since 2013 gaining 13.4% for 2016. The S&P 500 added 9.5% for the year and NASDAQ rose 7.5% -- the biggest gains since 2014.
The 2016 rally extends a bull market that has tripled the DOW since its low during the financial crisis in March 2009 of 6,547.05 to multiple new highs, closing above 19,000 for the first time on November 22 and flirting with crossing the next thousand-point milestone of 20,000 as we closed out the year.
It is good to remember that stocks weathered several shocks in 2016: a recession scare at the beginning of the year as a weak Chinese yuan sparked global selling with investors growing worried about a slowdown in the world's second largest economy and a possible U.S. recession; a shocking vote by Britain to exit the European Union (Brexit); and, the surprise presidential election of Donald Trump.
A rebound in corporate earnings, accelerating U.S. economic growth and stabilizing oil prices helped stoke investor enthusiasm for stocks. The rally gathered pace after the election of Mr. Trump on November 8, as investors bet the new administration would usher in business-friendly policies – like tax cuts, looser regulation and fiscal stimulus.
U.S. GDP advanced at a 3.5% inflation – the strongest reading in two years following three straight quarters of sub-2% growth. The unemployment rate has fallen to 4.6% and U.S. corporate earnings are growing after several quarters of declines. The Federal Reserve having warned of raising rates as many as four times during the year, held off for most of the year, finally raising the rate once in December by a quarter percentage point.
A stall in the recent rally has raised questions about whether stocks will continue to surge into 2017. Mr. Trump's policies could fall short of expectations or face headwinds with lack of consensus or inability to effectively execute these policies. The rally has made stocks even more expensive by historical measures: shares of companies in the S&P 500 traded at an average of roughly 21 times their past 12 months of earnings, above their 10-year average of 16, according to FactSet.
As we look back on 2016 and view 2017, many of the assumptions made over the last few months that have fueled the rally are speculation and will stand on firmer ground with additional support from actual policy changes and the economy.