2016: A Successful Maiden Voyage

2016 saw quite a few interesting events in the U.S., and this held true for US equity markets as well.  All three major indices were in correction territory (down 10% or more) by February of 2016.  US markets experienced a shock the day of Brexit, only to rebound nicely in July.  Then, markets were relatively quiet (albeit slightly negative) heading into the US presidential election, and as they say “the rest is history.”  All things considered, 2016 turned out to be a successful maiden voyage for our tactical models. 

Our tactical models were in a defensive posture to start 2016, and as such were largely insulated from the correction from January to February.  For nearly the rest of the year, our models moved sideways along with the market as trends were hard to identify up or down.  We were thankful our models were bullish heading into the US election as their performance received a nice bump in November before finishing the year relatively quiet in December.

For the last few years, we have seen this occurrence where US equities have a strong year, but everything else seems to trail.  Fixed income was relatively flat as bonds took it on the chin in November and early December.  Despite continued growth overseas, international stocks struggled due to the strengthening dollar, and that trend will likely continue.  We still believe short-term interest rates (those that can be influenced directly by Fed policy) can only rise so far unless long-term interest rates also rise.  Changes to the corporate tax code have largely been priced into the markets already, so any surprises to the contrary could result in a sharp downturn.

Even with the challenges our economy continues to encounter, it is important to note that our economy is still growing.  Severe downturns like 2008 are statistical anomalies.  It doesn’t mean we will never see that type of downturn again, but it does make it statistically unlikely to happen in the near future.  Corrections are healthy for the markets, and are essential in preventing large drawdowns like 2008.  Without corrections or additional stimulus to jumpstart growth, then we will likely experience lower returns for US equities.  This likelihood only increases the importance of tactical trading as our models look to identify areas of outperformance in the market. 

Thank you for entrusting us with your retirement future.  We look forward to a successful 2017!

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