“Well, Jane, it just goes to show you, it’s always something – if it ain’t one thing, it’s another.”
– Roseanne Roseannadanna
In one form or another, whether in our quarterly commentaries, market updates, our annual Investment Perspectives, or in direct communication with our clients, the RGT investment team has been consistent in our stance that predicting the future is monumentally difficult, if not impossible. So when we actually make a prediction, and it turns out to be correct, we feel it’s worth noting. We ended our last quarterly commentary with, “One thing of which we can be reasonably certain: there will be something interesting to write about next quarter.” I think we can all agree that we nailed that one.
While 2016 was shaping up to be a good year for U.S. equities, entering the fourth quarter, following President-elect Trump’s surprising victory, domestic stock markets roared even higher. The best performing asset class, for both the quarter and the year, was U.S. small-cap stocks. As measured by the Russell 2000 Index, small-cap stocks shot up 8.83% in the fourth quarter and ended the year up 21.31%. That was quite a rebound for small-cap stocks, which returned -5.71% in 2015. This speaks to the volatility that investors in small-cap stocks have faced over the last 10 years. Since 2007, small-cap stocks have returned a compounded average of 5.75% per year. But, to realize that return, investors had to endure four years of negative returns (2007, 2008, 2011, and 2015); the worst, of course, was 2008 when the Russell 2000 was down -34.8%. It is important to remain invested through these downturns, as illustrated by the fact that those four years of negative returns have been offset by four years of positive returns exceeding 20% (2009, 2010, 2013, and 2016); the best of which was 2013 when the Russell 2000 was up 37.0%.
Large-cap U.S. Stocks, as represented by the S&P 500, rose more modestly in the fourth quarter, up 3.82% to end the year with a respectable 11.96% return. Stock markets in the rest of the world did not fare so well. The MSCI-EAFE Index, which represents the performance of large- and mid-cap securities across 21 developed markets, was down -0.71% in the fourth quarter and up only 1.0% for the year. Representative of all global equity markets, with performance of large- and mid-cap securities across 23 developed markets and 23 emerging markets, the MSCI-ACWI Index was up 1.27% in the fourth quarter and 8.36% for the year.
But, as Rosanne Roseannadanna noted, it’s always something. And in the fourth quarter of 2016, that something was bonds. Bond investors endured a roller coaster ride in 2016. The 10-Year Treasury rate began the year at 2.24%, but proceeded to fall throughout the first half of the year, bottoming out a 1.37% on July 5th. However, following the November election, interest rates soared, with the 10-Year Treasury peaking at 2.6% before settling at 2.45% at yearend. As a result, bond markets sold off, with the Bloomberg/Barclays U.S. Aggregate Index down -2.98% in the fourth quarter. Municipal bonds didn’t fare much better, down -2.63% for the quarter, and -0.39% for the year.
If 2016 didn’t illustrate the importance of owning a diversified portfolio, then just wait. We’re sure to get another great example, at some point, in the not-so-distant future.