Happy New Year!
If you take a look around the press, and even more so the internet, you’ll get the impression that a lot of people are grateful to see the back of 2016.
But for equity investors at least, it was a pretty good year…
2016 was a surprisingly good year for markets
Let’s say someone had told you the following on 1 January, 2016.
“By 31 December this year, the UK will have voted for Brexit. It’ll also have a new prime minister and chancellor. Over in America, meanwhile, they’ll have voted for Donald Trump to be president.”
Let’s say that this clairvoyant was blissfully uninterested in stock markets, and so couldn’t tell you anything about the market reaction.
Would you have bet on the Dow Jones ending the year at near 20,000? And the FTSE 100 being at a record high of 7,142?
I’m guessing probably not. Brexit was supposed to send the UK economy into recession by the end of 2016. As for a vote for Trump – well, all bets were off.
As it turns out, it wasn’t all plain sailing. But that was mostly due to turmoil in China at the start of the year. As the FT notes, in the US, the S&P 500 was down by as much as 10.5% earlier in the year. Yet the US market finished 2016 with a gain of 9.5%, helped by an end-of-year post-Trump surge.
And the US was nowhere near the biggest developed market gainer for the year. If you’d bought Germany’s DAX index at its 2016 low (back in February), you’d now be up more than 30%.
So what actually happened last year?
It wasn’t all about politics. In fact, you could question how much of the market’s overall movements were about politics at all.
Two of the biggest investment events of 2016
First off, the commodities bear market ended. No wonder – it had been going on for five years.
As bear markets go, it was a thing of beauty. A bell rang clear and loud, almost at the very top of the market. In May 2011, Glencore, the world’s biggest commodity trading company, went public in London. Literally a couple of weeks before the IPO, the Bloomberg Commodity Index topped out.
There then followed an epic bear market. As The Economist pointed out in summer 2015, if any other market had collapsed as badly as the commodities market, it would have been front page news across the globe.
As it was, it didn’t really garner the attention it perhaps deserved until near the very end. You see, the same bell that had signalled the start of the bear market then rang again at the end.
Fears over Glencore’s solvency surfaced in September 2015. Some even argued that it could be the Lehman Brothers moment for the commodity complex. Those sorts of panicky headlines would have got any contrarian pondering.
In any case, Glencore’s woes weren’t quite as elegant a marker of the bottom as its listing was of the top. The share price didn’t bottom out until January 2016, along with the Bloomberg Commodity Index.
But still, if you’d bought either Glencore or commodities in September 2015 and held on through the last painful ravages of the bear market, you’d be laughing now.
The return of rising interest rates
The other big thing that happened was that the financial sector started to recover dramatically after a big plunge in 2015. What drove that?
It was mainly the hope that interest rates may finally be starting to think about rising – and not just in the US. Higher interest rates are good for banks’ profit margins, hence the rising financial sector share prices.
In February, deflationary fears were hammering the stockmarket. But even when stocks bounced back, government bond yields didn’t. They kept falling until finally hitting the bottom in July. That was when the post-Brexit angst was at its highest.
Then, put simply, the market got a grip. It realised that if Brexit was the worst thing that could happen to the global economy, then things weren’t all that bad.
Meanwhile, the US Federal Reserve started to talk a slightly tougher game on interest rates as the US economic data kept improving.
As a result, US Treasury yields ended the year pretty much back where they started it. And the expectation is that they’ll continue even higher.
Will these trends continue this year?
Will all of this continue into 2017? As far as commodities and miners go, they’ve had a great year. But I can see them going further this year. It was a long bear market, so it would be surprising for things to turn bad again so rapidly.
As for interest rates, that’s trickier. I reckon we’ve seen the bottom. But will they rise rapidly? That does depend more on what politicians do next – will they really start spending? Or will we see another deflationary scare before too long?
That said, Britain is certainly likely to see inflation this year as the effects of the weak pound feed through. Germany should see rising inflation too, helped by the weak euro and its strong economy.
As for Japan – the jobs market is so tight there, that there are now two jobs available per potential employee. That surely has to have some impact on wages soon, particularly given that the government would like to see companies raising salaries.
And of course, rising commodity prices are themselves inflationary.
On top of all that, there’s plenty of political excitement to come, just as we saw in the year gone by. But I suspect that when we look back from the start of 2018, we’ll find that the noise from the politics will be less significant than perhaps we might expect today.
In the next issue of MoneyWeek, our roundtable experts give us their top tips for 2017. Don’t miss it.
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