The “Trump Effect” had a profound impact on financial market returns in the fourth quarter, however the impact was quite different depending on the market segment. Big winners included the U.S. dollar and the U.S. equity market, while bonds declined globally as did emerging markets equity (due to Trump’s anti-trade comments regarding China and Mexico). Oil also appreciated during the quarter, but give most of the credit to OPEC (and major non-OPEC producers) for agreeing to constrain supply in an effort to boost prices.
Looking back on the full year for 2016, investors could have had a wide range of outcomes depending on the emphasis on their portfolio. In general, bonds had one of the worst years in recent memory as fears of inflation and rising interest rates became mainstream (see Trump Effect above…). Bond returns were still positive however and diversification into corporate bonds and preferred equity would have helped boost returns. On the equity side, Canadian equity outperformed other major regions with smaller capitalization stocks rising almost 40%! U.S. equity returns were also quite healthy, but international equity returns were negative for the year – primarily due to weakening Euro and British currencies. Fortunately for Justwealth investors, we hedge currency in these asset classes!
Prior to the November U.S. election, economic data south of the border was relatively strong and showing positive momentum. The election of Trump as President, and his pro-business disposition, has fuelled speculation that this trend will not only continue, but accelerate. While in theory that is good for company profits (and thus stock prices) and bad for inflation (thus increased interest rates and depressed bond prices), at this point, it is still all speculation. The actual impact of Trump’s policies likely won’t be known for potentially a few years after the data becomes available post-policy-implementation. All of this is to say that perhaps the markets have gotten a bit ahead of themselves and a reversal of recent market action may be possible if events do not pan out as forecast.
In terms of our market outlook for 2017, we would like to point out to our clients that returns in the equity markets have been very strong over the past 5 years. That does not mean that we cannot have another strong year in 2017, or that a correction is inevitable, but that we expect annualized returns in the equity markets to be in the high single-digit range (6-9%), not double digits. On the fixed income side, rising interest rates caused short-term pain in 2016, but this sets the stage for higher income potential for investors going forward. Our longer-term outlook for fixed income is in the low single-digit range (2-4%), but this can be improved for those willing to take a bit more risk in fixed income asset classes such as high yield bonds or preferred equity.
Here is a recap of market performance as of December 31, 2016*
|Asset Class||Market Index||Quarter||1 Year||3 Years||5 Years||10 Years|
|Fixed Income||FTSE TMX Canada Universe Bond||-3.44||1.66||4.61||3.22||4.78|
|Canadian Equity||S&P/TSX Capped Composite||4.54||21.08||7.06||8.25||4.72|
|U.S. Equity||S&P 500 ($Cdn)||5.94||8.09||17.65||21.14||8.47|
|Int’l Equity||MSCI EAFE ($Cdn)||1.31||-2.49||6.34||12.56||2.19|
* Performance annualized for periods greater than 1 year