The Market Was Up but My Account Wasn’t
Following the election investors listened to the television and looked at their accounts with some bewilderment. They were likely concerned that the market was rallying while their accounts were floundering.
2016 was a tale of two very different markets. The first six months of 2016 generated positive returns across fixed income asset classes, with the exception of energy and commodity-related credits. The second half was dramatically different after the Brexit vote in July as the U.S. 10-year Treasury yield hit a historical low of 1.36%. Fixed income assets then began trending lower until the U.S. Presidential Election kicked off the sharpest selloff in fixed income assets since 2013.
The most commonly referenced fixed income index, the Bloomberg Barclays U.S. Aggregate Index, posted a loss of -2.98% in the 4th quarter. This was the largest quarterly loss for the index since the 3rd quarter of 1981 and the 5th worst quarter since inception in 1976. The loss also exceeded the 2nd quarter of 2013 during the “Taper Tantrum” which posted a -2.32% loss
As you may recall, November marked one of the worst performing months for Municipals in history: the 5-year Municipal lost -2.68% and the 7-year dropped -3.68%, both record-breaking losses for a single month. The 10-year Municipal lost about -4.5%, but no records were broken.
Improving growth expectations along with healthy labor markets in the United States, improving global growth expectations, improving manufacturing data and falling recessionary odds in developed and developing markets all pointed to higher rates by year end. With the removal of election-related uncertainty along with the prospects of fiscal stimulus, in the form of lower taxes, less regulation and more government spending, equity markets rallied strongly and rates ended the year with the largest increase since the “Taper Tantrum” in 2013 culminating in a FOMC (Federal Open Market Committee) hike in December. Unlike the “Taper Tantrum” in 2013, sparked by Federal Reserve intentions to taper quantitative easing (QE) programs, the sharp increase in rates to end 2016 was supported by improving fundamentals and stronger equity markets likely portending more rate hikes and higher interest rates through the balance of 2017.
As we consider 2017, we believe fixed income portions of your portfolio will continue to fluctuate, however, with the interest you received it should steady the fund or asset. We believe the sharp and sudden rise of interest rates was an anomaly. While 2017 will continue to see the 10-year treasury rate fluctuate, it likely will not rise much beyond 3.0%. You likely are in excellent fixed income funds that have done well over the past years and will likely continue to provide you the appropriate return for the risk. Call us if you would like to further discuss 2016 or any other financial planning concern.
Source: Advisors Asset Management, Bloomberg Barclays and US Department of the Treasury