Market Commentary: 4th Quarter 2016
By: Lisa Thuer - Senior Trading and Research Specialist
The year 2016 started out by taking the polar plunge.
China came out with disappointing manufacturing data, sending all markets on a free fall. Analysts and economists reports stated slower earnings and economic growth. The Federal Reserve, after raising rates a quarter point in December refrained from raising interest rates a second time, stating that the economy was too fragile. Yet they were calling for 2-3 rate hikes in 2016, but they only raised rates once. Early in the year markets rapidly dropped day after day, at the same time, oil hit a low of $26 per barrel. Were we on the brink of a recession?
Then in February the whipsaw came; new data stated a recession was less likely than feared and the markets rebounded, however not all sectors participated. Healthcare and FANG (Facebook, Amazon, Netflix, andGoogle) stocks were not taking part in the rally, yet utilities and telecom were skyrocketing. There was a flight to safety and value on the forefront.
All was going well until the next big uncertainty hit the market â€“ Brexit! The markets were rattled leading up to Brexit. As the election was nearing the polls were stating that the U.K. would remain in the Eurozone. The markets reacted positively, but then the votes were tallied, and we soon learned that the polls were wrong. The U.K. voted to leave the Eurozone; the markets were shocked and once again plunged. Financials took a beating and the Federal Reserve decided not to raise interest rates at that point and furthermore no rate hike was insight. We were in uncharted territory and everyone was predicting we are on the brink of a disaster. Once again, this wiped out all of the market gains. After some digesting, all wasn't as bad as first stated, and the market hit the road running, we were upward once again.
As if all this news wasnâ€™t enough for the markets to digest, America was in a very unusual presidential election year. A New York Business Man running against a Woman, with political experience. But there is no need to go into details about that, as we all know the outcome. Everybody we talked to could not wait for the election to finally be over. But, once again the polls had it wrong, which again sent the markets into a tailspin. As the market did a complete turnaround and climbed to new highs. Based on optimism, equity markets climbed as the bond prices fell. KFA was feeling a little overdone in both areas and we wanted to let the markets settle down just a bit before jumping back in with both feet.
2016 is now behind us and as we reflect on our portfolios, not only did the economists predict incorrectly, so did some analysts, but we at KFA, also erred on the conservative side. Financials tanked after Brexit in the uncertainty of how banks would be affected by the change. But after the US election of Donald Trump â€“so far financials have been leading the way. Healthcare stocks took a beating for most of 2016, but since the election we are starting to see some recovery in that sector also. We canâ€™t help but wonder; had Hillary Clinton wonâ€¦ would we be seeing the same results, she made it clear that she was very much against Drug Companyâ€™s price gouging. We are not saying that Trump isnâ€™t against price gouging; he just took a different approach on the subject.
In an effort to keep risk out of our clientsâ€™ portfolios, it may have kept us from partaking in some of the upside of the market recovery. However we feel that this is a small price to pay for what could have turned in a different direction. We had certain situations that did go south last year, and we wanted to do what we could to make sure that our clients were protected. Even the best of economists and analysts had a hard time forecasting last year, and some were just down right wrong. It was definitely an unusual time. We are seeing that the portfolios which benefited most last year are the ones that did nothing from start to finish and just rode the markets ups and downs.
2017 is now upon us, and this January in comparison to last January, we are seeing a reversal in the markets, we are also seeing green lights ahead. Some areas of interest to KFA are Aerospace, Defense, and Financials (in particular regional and smaller banks). Along with Information Technology (IT), Infrastructure and Small Companies ,while holding on to our Large Cap Dividend payers, which will benefit investors if the overseas earnings are repatriated, bringing offshore monies back to the U.S.
We continue to look for preservation of capital and yield as our conservative portfolios continue to hold a larger portion of their portfolios in these areas. Alternatives and Market Neutral holdings continue to be a part of our portfolio to keep a balance to the uncertainty that always faces us. Bonds and bond funds are known to be less volatile- however as of late even they have seen more volatility than normal.
If only we had a crystal ball to help us predict the future, life would be so much easier. But for now,
we need to go by research, and sometimes even gut feelings, and the knowledge that we need to make money for our clients while we are protecting them from markets down falls.
With the start of a New Year, please consider that this is a good time for clients to review your portfolio risk tolerance. Have you had any life changing events last year or an upcoming event that you know about that has changed or may change your needs? Whichever it may be, the start of the year is always a good time to revisit your risk tolerance.
If you would like to come in, or have a telephone conference with a KFA team member, please feel free to contact us, we love hearing from our clients. KFA will work with you to make the necessary risk adjustments to your portfolio. As always, we thank you for your confidence in us and we look forward to 2017 being a great year!