The Year So Far

There are only a few trading days left in 2016, so it’s a good time to step back and look at the trends and returns for the year.

Before we look at the numbers, consider the changes in fortune during the year. It started with a stock bear market and other problems in China. These problems spilled to the rest of the global markets and created a widespread fear of a global deflation. This caused equities to fall. Interest rates dropped sharply, boosting bonds and other income investments.

Central banks around the globe coordinated efforts to combat these trends by boosting money supply. At the same time, China changed its policies to put a floor under its stock indexes and reduce debt. The measures worked quickly. Interest rates and bonds soon bounced off their lows. U.S. equities bounced off their lows on Feb. 8 and proceeded to reach a number of record highs later in the year. Emerging market assets also had strong recoveries. European and Japanese equities didn’t perform as well because of the continuing economic problems in those regions.

In June, global investors overreacted for a few days to the U.K. vote to leave the European Union. But investors realized changes weren’t imminent, and markets resumed their recoveries.

In the fall, U.S. stocks began to stagnate and even declined just before the election. But once the election results were in, things changed quickly. U.S. stocks, especially small company stocks, soared to a series of new highs. Interest rates rose sharply, and that led to much lower bond prices. That’s where we sit now as investors digest recent market moves and try to determine the longer-term effects of the election.

The S&P 500 was down over 10% for the year in early February. But now it is up 13.12% for the year to date and 5.23% for the last three months. The Dow Jones Industrial Average is doing better, up 17.35% for 2016 and 9.69% for the last three months. The Russell 2000 soared 23.08% for the year to date and 10.91% for the last three months.

The All-Country World Index is up 8.86% for 2016 and 1.46% for the last three months. To show the importance of currency changes this year, when the All-Country World Index is hedged back to the dollar, it is up 8.81% for 2016 but 6.83% for the last three months. The dollar has surged since the election. That has hurt returns of non-U.S. investments for U.S. investors who didn’t hedge the currency. With this index, hedging the currency more than doubled the returns to a U.S. investor.

Emerging market stocks were leading the way earlier in the year. Now, they are up 9.23% for the year to date but are down 7.83% for the last three months. That’s partly the result of the strong dollar and also partly a reaction to the election, as investors worry the new administration will impose trade restrictions that harm emerging economies.

Interest rates were rising in the second half of the year but really shot up after the election. Long-term treasury bonds, which were up about 18% in July, are up only 0.24% for the year to date and lost 12.41% in the last three months. Investment-grade bonds are up 5.27% for the year but down 4.14% for the last three months. Treasury Inflation-Protected Securities (TIPS) are up 3.54% for the year but down 2.73% for the last three months. High-yield bonds, as usual, followed stocks more than bonds. They are up 13.03% for the year and 1.32% for three months.

The dollar, as mentioned, surged after the election. It is up 4.09% for the year to date but 7.62% in the last three months.

Energy-based commodities are up 7.94% for the year to date and 6.08% for the last three months. Broader-based commodities are up 11.32% for the year and 1.92% for the last three months. Gold had a very volatile year but generally was hurt by the election results. Gold is up 6.55% for the year but down 15.18% in the last three months.

The Data

Housing starts are matching up with the recent optimism of home builders and strong new home sales. October’s housing starts were revised much higher to a gain of 27.4%, but November’s housing starts declined 18.7% and were below expectations. Permits for new buildings also were down and lower than expectations. The latest new home sales figures will be released Friday.

Existing home sales, which had been weak the last few months, rose 0.7%. That was above expectations. Also, last month’s number was revised higher. Further, the November existing home sales registered a high for this recovery, and October’s revised number is the second highest for the ongoing recovery. For the past 12 months, existing home sales increased 15.4%. That’s a bit misleading, since November 2015 sales were abnormally low for technical reasons. The real 12-month number is more like 6%. Prices also rose, apparently because the supply of homes for sale is low.

The FHFA House Price Index climbed 0.4% for the month and is up 6.2% for 12 months.

It looks like potential buyers are rushing to make their purchases before interest rates and prices rise further. We’ll see if that momentum can continue into 2017.

The non-manufacturing economy continues to do well, though perhaps at a slower pace. The PMI Services Index mid-month flash came in at 53.4. That’s down 1.3 points from the end of November but still indicates moderate growth.

With Durable Goods Orders, we need to look behind the headlines. Orders declined 4.6% after rising 4.8% last month. But the decline was due to the volatile transportation sector because of aircraft sales. Excluding transportation, orders were up 0.5% and are up 1.8% for 12 months. More importantly, core capital goods are up 0.9% for the month and now are down only 3.2% for 12 months. Core capital goods are basic business investment, and an increase here is a sign businesses are optimistic about the future.

The Personal Income and Outlays report was full of surprises. Personal Income was unchanged after several months of solid gains. Spending rose 0.2%. That’s not bad, considering income didn’t increase, but it is lower than in recent months. Inflation, as measured by the PCE Price Index, was flat, also after several months of increases. That leaves 12-month inflation for core prices at 1.6%.

The third estimate of third quarter GDP showed another increase to an annualized growth rate of 3.5%. That’s the highest level in two years. Consumer spending was increased in the latest estimate, as was non-residential fixed investment.

The Index of Leading Economic Indicators compiled by The Conference Board was unchanged.

The Markets

The S&P 500 is up 0.54% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 0.73% for the week. The Russell 2000 rose 1.41%. The All-Country World Index gained 0.17%. Emerging market equities lost 1.03%.

Long-term bonds gained 1.29%, their first winning week in a while. Investment-grade bonds gained 0.74%. Treasury Inflation-Protected Securities (TIPS) gained 0.08%. High-yield bonds gained 0.71%.

The dollar gained another 2.22%.

Energy-based commodities took a break from their recent surge, gaining only 0.13%. Broad-based commodities lost 1.08%. Gold continued to fall, declining another 0.91% for the week.

Bob’s News & Updates

If you’re retired or plan to retire someday, you should read my latest book, the revised edition of “The New Rules of Retirement.” Think of it as “the best of Retirement Watch.”

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