2017 Stocks: What Did We Learn from 2016?

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2017 Stocks: What Did We Learn from 2016?

By Andrew Hecht / TFNN.com

As the end of the year is upon us, equity prices have staged an impressive rebound from where they stood just six weeks into the year. At the beginning of 2016, selling in the Chinese domestic stock market caused a bout of Asian contagion that reverberated around the globe like a tsunami of selling. The U.S. markets were not exempt from the selling and the S&P 500 fell by 11.5% during the first month and a half of the year.

Equities hit their lows for the year on February 11 and have rebounded since. As of Friday, December 16 the S&P 500 was up by more than 4% on a year-on-year basis, quite a reversal of fortune from the February lows. 2016 was a year of surprises in markets and political events dominated the news. We learned to expect the unexpected over the past year as political analysts and market pundits got things consistently wrong.

2016- Expect the unexpected

While the equity sell off in China was the first event of the year, it was only a prelude to other surprises that caused markets across all asset classes to move dramatically. European and Japanese short-term interest rates remain in negative territory and it took the U.S. Fed until December to hike the Fed Funds rate by 25 basis points. The U.S. central bank had promised 3-4 rate hikes in 2016 but market developments caused them to only deliver one rate increase supporting stock prices.

Meanwhile, on June 24 Britain shocked markets and political analysts as the Brexit referendum turned out to be a rejection of Europe and globalism. The vote to divorce from the European Union came as a shock and equity prices moved sharply lower initially as fear and uncertainty gripped markets. However, in just a few sessions equity prices reversed and made back all of the losses that followed the shock of Brexit.

On November 8, the markets experienced an even greater shock from the political world as Donald J. Trump won a hotly contested Presidential election in the United States over the favorite candidate Hillary Clinton. Political analysts predicted a big Clinton win, they got it wrong. Market analysts had projected that a surprise win by candidate Trump would cause stock prices to tank, the market analysts were right but only for a few short hours. Source: Barchart

As the daily chart of the S&P 500 E-Mini highlights, the index dropped from 2135.50 to lows of 2,028.50, a decline of 5%, as the election results unfolded.

However, the selling quickly evaporated and in another case of misguided analysis by market experts the index closed at the highs on the day following the election and has rallied aggressively since making a new all-time high. Moreover, the Dow Jones Industrial Average is fast approaching the 20,000 level and the bearish projections that preceded the election have turned to optimism.

President-elect Trump ran on a platform of lower taxes, fewer regulations and a rebuilding of infrastructure in the U.S. and equity buyers have gobbled up stocks since the election.

The next big market surprise came on November 30 from the world oil cartel, OPEC. After more than two years of a strategy to flood the market with crude oil, the cartel with the assistance of the Russians decided to cut production for the first time in nine years. The price of the energy commodity has rallied to above the $50 per barrel level in the wake of the OPEC announcement. A higher oil price means that some shale output in the United States will return to the market as the price is now back above production cost for some producers. The higher oil price has caused the prices of many energy related companies to rise on the stock market, another factor vaulting equity prices to all-time high.

On December 14 the U.S. central bank finally acted and hiked the Fed Funds rate by 25 basis points, the first and last hike of 2016. However, the Fed added the potential for another hike in 2017 in their post-meeting statement increasing the number of projected rate increases for the coming year to three.

2016 was a year of surprises and a year where many analysts got things dead wrong. 2016 was a year of volatility for markets across all asset classes. It was a year of bullish and bearish trends, a year of reversals and a year where trading rather than investing led to optimal results. 2017 is likely to bring more of the same and when it comes to equities, we could be in for some wild markets in the coming year.  If 2016 told us anything, elections in German, France and the Netherlands are likely to continue to yield political surprises that will translate to market volatility.

Higher rates are coming and stocks are expensive

The U.S. central bank told markets to expect three rate hikes in 2017 but the bond market has already been telling us this since July. 30-year Treasury yields were at the 2.1% level in mid-July and have increased to almost 3.2% recently in a sign that the days of historically low rates in the U.S. have come to an end.

While the Fed determines the short-term Fed Funds rates, it is the market that determines longer rates and price action is telling us that the Fed will be acting more aggressively in 2017 when it comes to rate hikes.

Higher rates tend to be a bearish factor for stock prices and with the average price to earnings ratio of stocks in the S&P 500 at 28 times earnings, stocks are historically expensive.

While equity prices in the U.S. continue to rise, it could be a case of a lack of end of year selling as the market assumes that tax rates will go down in 2017. Additionally, the prospects for a higher oil price and infrastructure building in the U.S. create bullish and bearish influences in the stock market as we head into the New Year. Right now stocks are flying high but with so many competing issues pulling equities in both directions, it is a safe bet that we will see lots of price volatility in 2017.

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2016 has taught us to expect the unexpected. Trading rather than investing is likely to remain the optimal strategy when approaching markets in 2017. When it comes to stocks, the U.S. election has created a great deal of optimism leading equity indices to all-time highs. However, interest rates are heading higher, the dollar is flying high and the world remains a volatile place from both a political and economic standpoint. Expect lots of variance in markets which will create very risky periods. Nadex products are tools that can help when approaching volatile markets to enhance your portfolio while at the same time limiting risk.

 

Nadex Risk Disclaimer

Trading on Nadex involves risk, which may result in financial loss, and may not be appropriate for everyone.  Any trading decisions that you may make are solely your responsibility.  The information presented in this webinar is for informational and educational purposes only.  The contents of this webinar are not an offer, or a solicitation of an offer, to buy or sell any particular financial instrument offered on Nadex.  Past performance is not indicative of future results.

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