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After Sixth Gain in Eight Years, S&P 500 Bull Market Endures
January 16, 2017 8:02 amVideo
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2016 was a rocky year for US and global equities. After the worst start to a year on record,[1] the S&P 500 Index ended with firm gains, driven by newfound optimism in the direction of the economy after the election of Donald Trump to US President on November 8.
When it was all said and done, the S&P 500 returned 9.5% in 2016, and that was after posting three weekly losses in the final five.[2] At its peak, the large-cap index was up 11.1% for the year.
2016 was the S&P 500’s sixth gain in the past eight years. The upbeat performance made geniuses of US equity strategists who accurately predicted a 9.5% gain for the S&P 500 over the calendar year. According to Bloomberg, analysts’ accuracy in predicting the annual gain of 9.5% is unprecedented going back to 2000, when data collection first began.[3]
Wall Street’s other benchmark averages also had an impressive year filled with multiple record highs and strong momentum down the stretch. The technology-heavy Nasdaq Composite Index rose 7.5% in 2016. The Dow Jones Industrial Average gained 13.4%, and at its height came within a few points of 20,000, a major milestone.[4]
If one were to assess the market rally fairly, they would conclude that the bulk of the gains had less to do with fundamentals and more to do with expectations. Wall Street emerged from a prolonged earnings recession in the third quarter, but investors were still nervous about the possibility of Donald Trump leading the world’s largest economy. In fact, the market was so concerned about a Trump election victory that the S&P 500 sold off for nine straight sessions in the lead up to the November 8 vote. That was the longest losing streak since December 1980.[5]
It wasn’t until after Trump was elected that the market turned euphoric on hopes of faster economic growth fueled by steep corporate tax cuts and a trillion-dollar stimulus program. Even concerns about faster inflation weren’t enough to slow the rally, as US stocks strung together an impressive uptrend that continued until the holidays.
At the start of 2017, markets have continued their upward trajectory. With less than two weeks until inauguration day, investors are still bullish on Trump’s plan to stimulate economic growth and “Make America Great Again.”
2016 was also an interesting year for volatility. When it comes to stocks, volatility is expressed by the CBOE VIX, a measure of implied uncertainty over the next 30 days. The VIX, which tracks inversely with the S&P 500 most of the time, averaged 15.8, down from 16.7 in 2015 and 19.5, the average since the market rally began in 2009.[6]
Although volatility ended lower, it made its return on several occasions during the year. The January and February selloffs pushed volatility higher, as did the landmark Brexit vote on June 23, which resulted in the biggest equity blowout on record. Volatility also returned after Labour Day, as investors began to price in the Federal Reserve’s second rate hike in nearly a decade.
The Fed’s second rate hike came and went on December 14 with equities not much affected. In fact, stocks continued to set new all-time highs in the new year despite growing expectations for a faster rate hike cycle. The Federal Open Market Committee (FOMC) will hold its first policy meeting of 2017 on January 30-February 1. While no change in monetary policy is expected, central bankers are forecasting three rate increases this year, followed by three more in 2018.
With everything considered, 2016 was an impressive year for equities, as the bull market shook off an early correction, Brexit and the first rate hike in 12 months.
[1] Adam Samson and Mamta Badkar (January 18, 2016). “Wall Street makes worst ever start to a year.” Financial Times.
[2] Oliver Renick (December 30, 2016). “A 10% Rally in S&P 500 Makes Geniuses of Wall Street Strategists.” Bloomberg.
[3] Oliver Renick (December 30, 2016). “A 10% Rally in S&P 500 Makes Geniuses of Wall Street Strategists.” Bloomberg.
[4] Sam Bourgi (December 31, 2016). “2016 a Record-Setting Year for US stocks.” Economic Calendar.
[5] Joseph Adinolfi (November 4, 2016). ‘S&P 500’s 9-day losing streak longest since December 1980.” MarketWatch.
[6] Oliver Renick (December 30, 2016). “A 10% Rally in S&P 500 Makes Geniuses of Wall Street Strategists.” Bloomberg.
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