4th Quarter 2016 Market Commentary

Executive Summary

  • Year in Review – “Worst Start”, Brexit, Trump surprise victory
  • Small cap and Value stocks outperform
  • Interest rates decline mid-year, then rise to finish year higher
  • Will the US pass income tax and corporate tax reform in 2017?
  • Late innings for the current US economic expansion
  • The folly of forecasts 

In 2016, the US stock market reached new highs. You may recall that the market began the year with the “worst start” of any year on record. The “worst start” began early, with a 5% decline in the Dow Jones Industrial Average in the first four trading days in January. It continued in mid February, with US stocks down more than 11% for the year. By year-end the S&P 500 Index was up 11.96%. That’s a remarkable difference in market performance within the same calendar year. It makes the case for long-term thinking and following a disciplined approach to investing.

Last year was also a year marked by surprises. In June, voters in the United Kingdom voted to leave the economic agreement with the European Union. Prior to the voting results, almost every poll, and certainly the financial markets, expected a vote to remain in the EU. The reaction from financial markets to this surprise was initially strong. The Dow Jones Industrial Average lost 900 points in two days, and the British Pound declined below $1.30, a level not seen for over 30 years. However, within a week, global stock markets recovered their initial losses and even climbed higher. It was a remarkably fast reversal in market sentiment.

Markets reacted strongly to the surprise victory of Donald Trump in the US Presidential Election in November as well. This time, markets corrected even faster … literally overnight. On November 8, the day before the election, almost every poll predicted a win for Hillary Clinton. The New York Times gave Clinton an 85% chance of winning, and famed pollster Nate Silver of FiveThirtyEight predicted a 71.4% chance for a Clinton victory. To say that Trump’s win was unexpected is an understatement. What is more interesting, however, is the initial reaction and subsequent reversal in financial markets. As the election results became clear, Dow futures fell as much as 800 points. S&P 500 Index futures declined 5%, prompting a halt in trading. In Japan, the stock market was open overnight and closed down -5.4%. European markets initially traded down but finished the trading day higher than the open. US stocks initially opened lower on November 9, but recovered by mid-morning and closed in positive territory for the day. Stocks continued to rally through the end of the year. Read more

3rd Quarter 2015 Market Commentary


A wave of downward volatility greeted global investors during the third quarter of 2015. Many markets were down more than 10% from recent highs. This is often called a market “correction” by the media. Emerging market stocks took the worst of the hit. The MSCI Emerging Markets Index lost -17.90% during the quarter that ended September 30. Year to date, the emerging markets index is down -15.48%. International developed stocks gave back gains posted in the first half of the year. The MSCI EAFE Index was down -10.23% for the quarter and is -5.28% for the year. US Stock fared better than international stocks and were down -6.44% during the quarter. Commodities lost -14.47% during the quarter and are down -15.80% year to date. Global real estate also suffered losses, and the S&P Global REIT Index is down -4.36% year to date. Investors rushed to bonds for safety, pushing interest rates lower yet again. The Barclays Aggregate Bond Index is up 1.13% for the year.

Here is a word of caution before I continue discussing recent negative performance. Long-term investors should avoid making changes to their portfolio based on short-term market movements. The volatility we’ve seen this summer is neither extraordinary nor outside the norm. The S&P 500 Index declines on average -14.2% in a calendar year. [1]  The most recent pullback of -12.7% (from the highest point to the recent low) is less than that 35-year average. The rest of this letter is an explanation of what happened during the quarter and not a prediction. In ThirtyNorth’s conference room in New Orleans, there is a real crystal ball. It serves as a constant, tongue-in-cheek, reminder that no one can predict the future.

1,000 Point Drop

On Monday, August 24th, the Dow Jones Industrial Average opened down over 1,000 points. The index bounced back and ended the day off 588 points. “Dow Drops 1,000 Points” is an exciting and fear-provoking headline. Remember that 1,000 points on a base of 16,500 is 6.1%. Five years ago, the Dow Jones was at a level of 10,000, and a drop of 1,000 points would have been a 10% decline. Why do we have such difficulty interpreting a 1,000-point drop? Many financial headlines made comparisons to “Black Monday”, the day in 1987 when the Dow Jones dropped and closed down 22.6%. Can you guess how many points the Dow dropped on that day? Read more

1st Quarter 2015 Market Commentary

The first quarter of 2015 was mostly positive for global financial markets. In a reversal of roles, US stocks lagged the rest of the world with a 0.95% return. International developed stocks, boosted by the announcement of the European Central Bank’s version of quantitative easing, were up 4.88%. Stocks in emerging markets were up 2.24% in the quarter. Bonds continued to muddle along and were up 1.61% for the quarter. Interest rates declined sharply during the quarter but recovered to levels similar to year-end by the end of March. Global real estate, measured by the S&P Global REIT Index was up 3.85%, while commodities continued their slide down -5.94% year to date.

Central Bank Policies Diverge     

On January 22, the European Central bank announced its version of quantitative easing, a bond buying program of 60 billion per month through at least September 2016. The goal of the ECB’s program is to stabilize prices by raising inflation to at least 2.0%.[1] While the ECB hopes to accelerate an anemic economic recovery since 2013, bank President Mario Draghi clarified the limitations of monetary policy saying, “What monetary policy can do is create the basis for growth. But for growth to pick up, you need investment; for investment you need confidence; and for confidence, you need structural reform.”[2] It remains to be seen whether ECB countries such as Spain, France, Italy, or Greece, facing political opposition and high rates of unemployment, can find any consensus on structural changes.

Meanwhile, the Bank of Japan continues arguably the largest quantitative easing program, dubbed Abenomics for its mastermind Prime Minister Shinzo Abe. Although the program saw progress towards its 2.0% inflation goal in 2014, Japan’s most recent consumer-price index hit 0% in March. To date, the Bank of Japan has purchased ¥150 trillion, with the BOJ’s balance sheet equal to 66% of Japan’s GDP.[3]Prime Minister Abe’s attempts at structural reforms have so far been muted despite his political party winning control of the Diet in the mid 2013 elections. Read more

4th Quarter 2014 Market Commentary

Global market performance in 2014 was a mixed bag of results. US stocks were up, and large cap stocks outperformed small caps. The S&P 500 Index returned 13.69% for the year while the Russell 2000 Index (US small cap stocks) returned 4.89%. International and emerging market stock returns were negative for the year, punished by a rising US dollar. The MSCI EAFE Index was down -4.90%, and the MSCI Emerging Market Index was down -2.19%. To the surprise of everyone, US interest rates continued their decline in 2014. Bonds, measured by the Barclays Aggregate Index, were up 5.97% for the year. Declining interest rates boosted global real estate performance, and the S&P Global REIT Index was up 21.54%. Oil’s dramatic decline caused the Bloomberg Commodity Index to fall -17.01%.


Oil prices took a dramatic plunge, which began in late July and was exacerbated by OPEC’s (Organization of Petroleum Exporting Countries) November decision not to cut production. WTI (West Texas Intermediate) Crude began the year at $93.11/barrel, peaked in late June at $107.95/barrel, and fell to $53.45/barrel by year-end.[1] That is a 50% decline in six months! As of this writing, the price has fallen below $50/barrel.

While there are many speculative theories about the price decline, the reason may be as simple as a mismatch of supply and demand. Global production of petroleum products is currently higher than global demand. The current gap between production and consumption is roughly 500,000 barrels per day.[2]

U.S. crude oil production has increased from 5.4 million barrels per day (MMbpd) in January 2010 to 9.0MMpbd in October 2014, an increase of 66%.[3] While the drop in gasoline prices is welcomed by consumers at the pump, current prices will likely cause a slow down in capital spending on new oil production projects in the US. It’s important to remember there are both winners and losers in a lower oil price environment. Oil importing countries such as the US, Japan, China, and western Europe benefit from lower prices. Exporting countries are the losers, including Russia, Venezuela, Nigeria, Iran, and the Persian Gulf states. Oil prices will likely find equilibrium over the next two years as producers slow investment in new projects and older wells experience production declines or go offline. Oil importing countries may see a boost in demand as lower prices help their economic growth. Read more

4th Quarter 2013 Market Commentary

The US stock market pleasantly surprised everyone in 2013.  The S&P 500 Index experienced a record year. International stocks also had strong year, although emerging market stocks were down and trailed global stock markets significantly. Interest rates rose in 2013, causing negative returns for the bond market. Emerging market bonds, following a strong 2012, fell further than domestic bonds. Alternative investments were a mixed bag.  Global real estate was up slightly, while commodities were down due to weakness in gold, agriculture, and industrial metals. Of course calendar years are arbitrary measures for long-term investors who do not buy in on January 1st and sell on December 31st, but they do serve as convenient time periods for reflection and review of market performance.

Human nature dictates that we gravitate towards that gleaming return of the S&P 500 Index last year. We are tempted to measure our success against this number. How quickly we forget the reason we choose diversification in the first place! Remember the discussion about not “putting all of your eggs in one basket”? Let’s assume you were invested in a portfolio comprised only of the S&P 500 Index, and compare it to two hypothetical portfolios; a properly diversified 60/40 (moderate risk) portfolio and an aggressive portfolio of global stocks. We will compare an investment of $100,000 on January 1, 1995; one portfolio contains only the S&P 500 Index, one is globally diversified portfolio with 60% in global stocks and 40% in bonds, and the third is a globally diversified portfolio with 100% in stocks.[1] Read more