With 2016 behind us, there is plenty to look back on and plenty more to infer regarding 2017!
The year started like a derailed train. Oil was sinking to new lows as the supply glut was strangling prices. Economic data out of China tumbled during the first month and a half, causing great concern over the global economy. Also, the US had just raised interest rates for the first time since 2006. Between these factors, markets tanked for the first 6 weeks of the year.
Miraculously things improved as the Federal Reserve Board (FRB) became more dovish taking spring rate hikes off the board. Further, the June rate hike was tabled because of its proximity to the United Kingdom referendum to leave the European Union. This soft FRB stance weakened the dollar for the first substantial amount of time since 2014. This gave oil room to rebound to $50/barrel in June.
Brexit
The event that was predicted to be a non-event gave the markets ample data to react to. Two days of pull back gave way to a strong July rally. Steps by centrals banks in Europe and the United Kingdom helped to dissuade fears that Brexit would lead to a recession in Europe. The additional news that Brexit would be more than two years in the making helped alleviate fears of a contagion, causing other countries to follow suit.
The economic uncertainty following Brexit led to further dovishness from the FRB. Their decision to forgo a September rate hike made a December hike rather certain. A November hike was always perceived as unlikely due to its proximity to the US election.
US Election
Much like Brexit, the election brought an outcome that did not meet investor expectations. Also, much like Brexit equity market reaction was strong in the weeks following the election.
OPEC
Not to be outdone by the US election, OPEC came to an agreement to cut production by 1.2M barrels/day. This buoyed oil prices back to the $50 range. This action came at a great time as it countered the strengthening dollar seen after the FRB rate hike.
2017
So, what does all of this mean for 2017? A more bullish GDP view has led to higher expectations of inflation in coming years. Equity markets have risen to record levels and bond rates have climbed as well. In addition, the election continues to leave question marks regarding trade, taxes, and spending. Should things go as presented, 2017 could see growth potential that would come in waves. Volatility should be a common thread between 2016 and 2017; with the VIX ending at a low level of 14.04 points for the year. Deceptive in nature as it reached as high as 32.09 early in the year[1]. The volatility will not be wasted as we could end with similar market results as 2016.
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[1] www.marketwatch.com