Our Chief Investment Officer, Eric Cramer, gives a brief overview of what to expect for the 2017 Annual Market Reports.
Thanks for listening today. Please join us for one of several upcoming BIP 2017 Annual Market Report presentations.
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In 2016, without much fanfare, the stock market reversed a trend of the last two years. Small-cap value stocks surged, leaving larger growth stocks far behind. This trend persisted throughout the year, bringing multi-year averages back to rates of return that reaffirm the importance of the BIP strategy of overweighting small cap value stocks at the expense of large cap growth stocks.
But the overall rate of return for a globally diversified equity investor who indexed their portfolio was only in the high single digits for all of 2016. The MSCI ACWI IMI Net Index was up just 1.27% for the fourth quarter and 8.36% for all of 2016. The headlines we all read about a stock market rally just weren’t accurate.
The U.S. dollar has been strengthening for a few years now, and once again the BIP strategy of modestly overweighting domestic stocks at the expense of international stocks was successful because of that. Foreign market returns of nearly all asset classes have lagged their domestic counterparts over the past decade. But a strong dollar hurts U.S. competitiveness in the export markets, and that currency effect means we will be exporting growth outside of our borders. Emerging market stocks did fairly well in 2016, and we may see that continue into 2017 and beyond.
The fixed income market finally produced the volatility in the fourth quarter that we’ve been warning investors about. When rates are very low, a modest increase in yields will force prices significantly downward. The jump in rates after the election sent a price shock through the bond markets, creating quarterly losses. High returns from the first three quarters were almost completely erased. The net effect for the year was that most bond indexes held onto a small, but still positive, return. The Bloomberg Barclays Aggregate U.S. Bond Index lost 2.98% for the quarter, but ended the year with a 2.65% return.
Going forward, fixed income investors can look forward to more of the same. Rising rates will ultimately be good for fixed income investors, but volatile prices may keep this asset class from being the safe haven in once was. If interest rates do fall back again, as they did after the 2013 increase, then a one-time price bump won’t be much consolation for investors forced to endure years of low returns again.
In summary, the markets are in a very different posture from where they were a year ago. A less accommodative Federal Reserve and a new political environment are likely produce some big surprises. Investors need a plan that is geared to the risk they are prepared to endure.
Thanks for listening today. This is Eric Cramer, Chief Investment Officer at Buckhead Investment Partners. Goodbye for now and I look forward to seeing you at one of our upcoming Annual Market Report dinners, lunches, or on the webcast.
Disclosure: This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. The Global Equity index is the MSCI ACWI IMI Index, which is a free float-adjusted market capitalization weighted global index selected as the best available proxy for a diversified stock portfolio consistent with modern portfolio theory. Approximately 55% of the index is comprised of the U.S. stock market and 45% is comprised of international stock markets, including both developed and emerging countries. The “Net Total Return” version of the index is reported here, which means the index reinvests dividends after the deduction of withholding taxes, using a tax rate applicable to non‐resident institutional investors who do not benefit from double taxation treaties. The U.S. Fixed Income index is the Bloomberg Barclays Capital U.S. Aggregate Bond Index, which is a broad-based benchmark selected as the best available proxy for a high quality, diversified fixed income portfolio suitable for a U.S. investor. It is comprised of the Barclays Capital U.S. Government/Credit Bond Index, the Mortgage-Backed Securities Indices, and the Asset-Backed Securities Index. It is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, with maturities of at least one year, and an outstanding par value of at least $100 million. The “Total Return” version of the index is reported here, which means that dividends are included and reinvested. It is not possible to invest directly in this or any other index.