Yearly Economic Update: 2016 – The Year In Review

2016 Economic Review

THE YEAR IN BRIEF

After a bearish start, 2016 ended up being a good year for the bulls. The Dow Jones Industrial Average sold off 6% in January, dropping below 15,500 as investors worried about sinking oil prices and a slowdown in China’s economic engine. Eleven months later, the blue chips were nearing the 20,000 mark. Wall Street rode through the market shock brought on by the Brexit, rallied after Donald Trump’s presidential election victory, and priced in an interest rate hike by the Federal Reserve. Energy futures saw huge yearly gains. The housing market maintained its momentum, even as mortgage rates began to increase. Unemployment declined, consumer confidence grew, and the manufacturing sector expanded again. Investors awaited 2017 with some optimism.¹

DOMESTIC ECONOMIC HEALTH

When it came to GDP, the 2016 trend was upward. The economy grew but 0.8% in the opening quarter of the year, then 1.4% in Q2, and then 3.5% in Q3. On the downside, real GDP grew only 1.6% in the 12 months ending in Q3 as a 2.5% year-over-year advance for consumer spending was countered by a 2.7% decline in real gross private investment.^2,3

By November, the unemployment rate had fallen to 4.6%, which was 0.4% lower than a year earlier. Fewer Americans were underemployed as well, as the U-6 jobless rate dipped from 9.9% to 9.3% in that timeframe. Was the economy nearing full employment? Perhaps. The average wage had improved 2.5% in 12 months.^3,4

Consumer confidence indices improved as the year progressed. The Conference Board’s key index, maybe the most respected U.S. confidence barometer, hit 113.7 in December, rising steadily from a 92.4 trough in May. The University of Michigan’s consumer sentiment index started the year at 92 in January, hit a 2016 low of 87.2 in October, and then rose to a 2016 high of 98.2 in December (which was its best reading in nearly 13 years).^5,6

Did that confidence translate into greater retail sales? Yes. The Department of Commerce reported a 3.6% gain for non-food retail purchases for the 12 months ending in November. That beat the average advance of the past four years, and trounced the mere 1.0% rise seen in the year ending in November 2015.⁷

Annualized inflation rose from the minimal levels seen in 2015. By November, the Consumer Price Index was up 1.7% year-over-year. At that same time, the Federal Reserve’s preferred inflation gauge, the core PCE price index, showed a gain of 1.6% for the 12 months ending in November. Wholesale inflation, diminished with the slide in commodity prices during 2015, made a 2016 comeback of sorts. The Producer Price Index advanced 1.3% from November 2015 to November 2016.^3,8

Manufacturing rebounded. In December, the Institute for Supply Management’s purchasing manager index for the factory sector rose to a 2-year peak of 54.7 – a great turnaround for a PMI that was mired below the 50 level in both January and February. (A reading below 50 indicates sector contraction rather than expansion.) As for ISM’s non-manufacturing PMI, it reached a 13-month high of 57.2 in November, with the December reading to be released in January.^9,10

The Federal Open Market Committee unanimously voted to raise the key interest rate by a quarter-point in December. That move took the target range for the federal funds rate to 0.50-0.75%. As the rate hike was announced, investors saw that the Fed dot-plot forecast included three rate increases for 2017 rather than two. Wall Street absorbed the news calmly. During 2016, the Street saw some momentous corporate deals (Bayer bought Monsanto; AT&T and Time Warner merged; and Anheuser-Busch took over SABMiller) and a major corporate scandal (Wells Fargo’s admission that its employees created about 2 million phony deposit and credit card accounts to meet sales quotas).^11,12

GLOBAL ECONOMIC HEALTH

Investment markets around the world recoiled when the United Kingdom voted to leave the European Union on June 23, approving the so-called “Brexit.” The Dow dropped 611 points after that surprise, and the pound sterling fell to a 31-year low. Prime Minister David Cameron resigned after the vote; his replacement, Teresa May, plans to initiate the Brexit process in 2017. Whether it will be a “hard” or “soft” Brexit remains to be seen; negotiation may end up preserving some of the U.K.’s present trade pacts with countries on the continent.^1,12

For the first time in eight years, OPEC oil ministers elected to cut production levels. That November decision was a boon for Brent and WTI crude prices. Other oil producers subsequently joined the agreement. Early in 2016, crude prices were hovering near 13-year lows, sending the economies of Venezuela and Brazil into deep recessions.¹²

The world’s second-largest economy seemed to stabilize during 2016. Economists widely predict that China’s 2016 GDP will be between 6.5-7.0%, not as high as it was earlier in the decade, but still comparatively h2 in the global picture. Downside risks seemed to have lessened as the year ended – crucially, the Caixin purchasing manager index of Chinese manufacturers improved a full point to 51.9 in December, nearly a 4-year high.¹³

Away from America, the planet’s two other prominent central banks showed no interest in tightening. The European Central Bank bought bonds all year and decided to extend its quantitative easing plan through the end of 2017. By March, it had taken its deposit rate down to -0.4% and reduced its 2016 GDP projection for the euro area from 1.7% to 1.4%. Battling deflation from yet another angle, the Bank of Japan announced a new policy focus on long-term interest rates. The BofJ now seeks to steepen the yield curve to boost bank profits.¹⁴

WORLD MARKETS

Looking at the world’s important stock benchmarks, the winners outnumbered the losers in 2016. Some of the largest yearly gains were seen in the Americas: in addition to a double-digit rise for the Dow, Canada’s TSX Composite improved 16.32%; Brazil’s Bovespa, 37.97%; and Argentina’s MERVAL, 44.90%. Mexico’s Bolsa rose 6.20%.¹⁵

Even with the Brexit shock, the United Kingdom’s FTSE 100 added 13.85% for the year. France’s CAC 40 improved just 3.96%; Germany’s DAX, 6.87%. Spain’s IBEX 35 lost 3.01%. The Russian Micex set the pace on the continent, advancing 26.76%. Among the Asia-Pacific indices, Taiwan’s TSE 50 stood out with its 15.26% gain. China’s Shanghai Composite took a 13.14% fall. In between, Hong Kong’s Hang Seng rose 0.54%; Japan’s Nikkei 225, 0.42%; Australia’s All Ordinaries, 6.57%; South Korea’s KOSPI, 3.06%; and India’s Sensex, 2.57%. The MSCI World gained 5.32%; the MSCI Emerging Markets, 8.58%. The FTSE Eurofirst 300 lost 1.18%.^15,16

COMMODITIES MARKETS

Major energy futures recorded staggeringly large advances in 2016. Natural gas soared 63.78% on the NYMEX; heating oil, 52.49%; and unleaded gasoline, 29.81%. WTI crude rose 46.12% for the year on its way to a final 2016 close of $53.89.¹⁷

Even with a h2 greenback and renewed interest in equities, gold, silver, copper, and platinum pushed higher on the year. Gold gained 7.18% across 2016 to settle at a COMEX price of $1,152.00 on December 30; silver increased 15.04%, ending the last trading week of 2016 at $15.96. Platinum futures improved 2.05%, and copper futures, 20.40%. The U.S. Dollar Index rose 3.63% in 2016. Eyeing crop futures, corn lost 0.36% on the year; wheat, 11.00%; and cocoa, 31.66%. Soybeans gained 15.78%; coffee, 10.82%; cotton, 13.82%; and sugar, 30.76%.^17,18

REAL ESTATE

The latest available data on year-over-year home buying showed a very healthy real estate market. The National Association of Realtors reported that through November, existing home sales had increased 15.4% in 12 months. New home buying, according to the Census Bureau, was up 16.5% in that same span. The eleventh month of the year found new home sales at their second-highest level since the end of the Great Recession, and existing homes moving at a pace unseen since February 2007.¹⁹

By raising interest rates a quarter-point, the Fed did not exactly throw cold water on a hot housing market. Mortgage rates were already climbing in fall after descending in summer. Comparing Freddie Mac’s December 31, 2015 and December 29, 2016 Primary Mortgage Market Surveys, a marked difference in the numbers appears. At the end of 2015, the mean interest rate on the 30-year FRM was 4.01%; the mean rate on the refinancer’s favorite, the 15-year FRM, was 3.24%; and, the average rate on the 5/1-year ARM was 3.08%. As 2016 concluded, the average rates looked like this: 30-year FRM, 4.32%; 15-year FRM, 3.55%; 5/1-year ARM, 3.30%.^20,21

Zillow said that the median U.S. home value was $192,500 as of November, representing a 6.5% annualized gain. (The median price of a listed residence was $238,990.) Tighter housing inventory was a factor pushing home prices north. As of November, the real estate sector had seen overall year-over-year declines in groundbreaking (6.9%) and building permits (6.6%).^22,23

LOOKING BACK…LOOKING FORWARD

The Dow Jones Industrial Average did not surpass 20,000 in 2016, but it came close, thanks to a 7.94% gain in the fourth quarter, finishing the year at 19,762.60. The NASDAQ Composite wrapped up the year at 5,383.12; the S&P 500, at 2,238.83. Small caps had a great 2016 – as investors sensed greater defense and infrastructure spending just ahead, the Russell 2000 jumped 8.43% in Q4 to finish 2016 at 1,357.13, up 19.48% for the year.¹⁸

What U.S. index was the top performer of 2016? The PHLX Gold/Silver index, which climbed 74.08% for the year, even while slipping 16.11% for the fourth quarter. The CBOE VIX “fear index” ended 2016 down at 14.04, taking a 22.90% yearly loss.¹⁸

Source: barchart.com, bigcharts.com, treasury.gov – 12/30/16^18,24,25,26

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

In March, the bull market will turn eight years old. How long can it keep going? Is it a mega-bull that can run for a decade – or longer? Maybe. As 2017 gets underway, the mood on Wall Street is essentially optimistic, with a sense that American companies will benefit from increased federal and personal spending. Stock values may be elevated, but few analysts have mentioned the possibility of a recession; few see the current business cycle peaking this year. Inflation has picked up, and the Fed may respond to it with the three 2017 rate hikes it has projected; the h2 dollar shows no signs of weakening. So, what kind of headwinds will stocks face? How will investors react to the Trump administration? How much of its planned financial and tax code reform will it be able to achieve? As much as investors would like a crystal ball for 2017, the new year presents major question marks. Last year taught investors that anything could happen; that lesson should not be forgotten in 2017. The outlook is still bullish as the year begins, with the belief that supply will keep rising to meet demand in many economic sectors. If that holds true, the economy and the stock market may be in for a very good year.¹

Citations.

1 – money.cnn.com/2016/12/30/investing/dow-stocks-2016-trump/index.html [12/30/16]
2 – tradingeconomics.com/united-states/gdp-growth/[1/3/17]
3 – forbes.com/sites/jeffreydorfman/2016/12/30/a-look-back-at-the-year-2016-in-economic-data/ [12/30/16]
4 – seekingalpha.com/news/3228272-futures-cut-losses-yields-slip-big-decline-unemployment [12/2/16]
5 – bloomberg.com/quote/CONCCONF:IND [1/3/17]
6 – tradingeconomics.com/united-states/consumer-confidence [1/3/17]
7 – jsonline.com/story/money/2016/12/14/november-retail-sales-up-36/95424044/ [12/14/16]
8 – investing.com/economic-calendar/ [1/2/17]
9 – tradingeconomics.com/united-states/business-confidence [1/4/17]
10 – tradingeconomics.com/united-states/non-manufacturing-pmi [12/5/16]
11 – cnbc.com/2016/12/14/fed-raises-rates-for-the-second-time-in-a-decade.html [12/14/16]
12 – omaha.com/money/brexit-trump-and-more-the-top-business-stories-of/article_1787e393-52a0-5ec8-b2ac-fe4e2646d743.html [12/31/16]
13 – economiccalendar.com/2017/01/03/shanghai-composite-index-climbs-on-h2-manufacturing-data/ [1/3/17]
14 – investopedia.com/news/biggest-market-surprises-2016/ [12/26/16]
15 – markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [12/30/16]
16 – msci.com/end-of-day-data-search [12/30/16]
17 – money.cnn.com/data/commodities/ [12/30/16]
18 – barchart.com/stocks/indices.php?view=performance [12/30/16]
19 – usnews.com/news/articles/2016-12-23/november-home-sales-spike-despite-price-inventory-concerns [12/23/16]
20 – freddiemac.com/pmms/archive.html [1/3/17]
21 – freddiemac.com/pmms/archive.html?year=2015 [1/3/17]
22 – zillow.com/home-values/ [1/3/17]
23 – tinyurl.com/gnoj2ns [12/16/16]
24 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F30%2F11&x=0&y=0 [12/30/16]
24 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F30%2F11&x=0&y=0 [12/30/16]
24 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F30%2F11&x=0&y=0 [12/30/16]
24 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F29%2F06&x=0&y=0 [12/30/16]
24 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F29%2F06&x=0&y=0 [12/30/16]
24 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F29%2F06&x=0&y=0 [12/30/16]
25 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [1/2/17]
26 – tinyurl.com/zpe8roj

QUOTE OF THE YEAR

“Things are never as bad as they seem.”
– Harper Lee

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