by Jay Marsden
1/11/2017

Overview

The year 2016 likely will be remembered for the election of Donald Trump as the 45th president of the United States and the Brexit vote. This year also saw the Fed raise interest rates for the first time since last December, noting that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since midyear. While inflation remains below the Fed's target of 2.0%, the Committee expects inflation to rise to its target level over the medium term on the heels of anticipated improvements in energy and import prices and continued labor strengthening. Equities began the year hitting the skids as receding oil prices and a plummeting Chinese stock market pushed stock prices down and bond prices up. By midyear equities had recovered, despite Great Britain's decision to exit the European Union. Following the results of the presidential election, stocks surged to new highs. Whether this trend continues in 2017 remains to be seen following President-elect Trump's first few months in office.

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Snapshot 2016

The Markets

Equities: The year didn't start off well for equities, but by the end of 2016 each of the indexes listed here posted year-over-year gains, some reaching all-time highs. The Dow recorded its best performance since 2013, gaining almost 13.5% from its 2015 closing value.

Bonds: Volatility best describes the long-term bond market for 2016. Yields on 10-year Treasuries rose for the second straight year as prices fell.

Oil: As oil producing countries flooded the market, oil prices fell below $30 per barrel during the first quarter. However, by the end of the year, crude oil prices had achieved their biggest annual gain since 2008.

Currencies: The dollar remained strong throughout the year, affecting imports and exports in the process. Falling oil prices, coupled with the expectation of higher interest rates, helped boost the U.S. dollar, which continued to rise over the course of the year.

The Economy

Employment: Improvement in the U.S. job market was slow but steady, with employment growth averaging 180,000 new jobs per month in 2016, compared with an average monthly increase of 229,000 new jobs in 2015. The unemployment rate ended the year (as of November 2016) at 4.6%, lower than the 5.0% rate at the close of 2015.

GDP: The economy maintained a roughly 2.0% average growth rate through the third quarter of 2016. Economic growth has maintained this pace since 2009.

Inflation/consumer spending: Based on the growth of consumer income, spending, and inflation, the economy for 2016 may be described as stable at best. Inflation remained below the Fed's stated target rate of 2.0%, but indications are that it is expanding, albeit at a deliberate pace.

Eye on the Year Ahead

As the year came to a close, the Fed raised interest rates based on some favorable economic news, particularly on the labor front and expanding economic activity. The Fed is expected to consider three more rate increases during 2017. New economic policies promoted by President-elect Donald Trump during his first year in office will likely impact the economy and equities markets, both domestically and abroad. Will stock prices, which rose dramatically in the weeks following the election, continue their bull run in 2017? Will oil prices reach $60 per barrel as OPEC attempts to curb production? Will the dollar remain strong, impacting import and export prices? Next year may ultimately prove to be as eventful as 2016.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.

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