Stocks Fizzle, Bonds Gain Ground – 2016 Ends

The year ended quietly last week, with low market volume and activity. Equity prices fell slightly, while commodities rallied modestly. However, emerging markets stocks reversed some of their recent weakness, gaining more than 2% during the week.

As 2017 begins, we believe that navigating developments in interest rates and currencies will be an important theme, as the direction of U.S. rates may continue to diverge from the direction of rates throughout most of the rest of the world.

GAIN: Active Asset Allocation

Stocks were down slightly during the final week of 2016, with foreign markets outpacing U.S. indices. The decline may have been driven by the rebalancing of portfolios out of this year’s winners, as there was little news to cause markets to drift lower. We may see more rebalancing during the first few weeks of January as more investors position their portfolios for the coming quarter.

Interest rates fell slightly for the second consecutive week, helping to boost bond prices. Both Treasury and corporate bonds rallied modestly.

Meanwhile, gold staged a reversal by moving higher last week—but the precious metal was still down more than 12% during the fourth quarter.

PROTECT: Risk Assist

The Risk Assist portfolios ended 2016 positioned to participate in the markets, with continued overweights in small-cap stocks, high-yield bonds and preferred securities.

The last week of the year ended quietly, with low volume during the holiday season and slightly negative market performance. Equity market volatility moved somewhat higher last week, with the CBOE Volatility Index (VIX) rising above 13 from around 11 the previous week. It is possible that the VIX could rise further during the coming week, as investors return from their holidays and trading volume picks up again.

SPEND: Real Spend

U.S. large-cap stocks (S&P 500) outperformed the broad U.S. bond market (Bloomberg Barclays US Aggregate Bond Index) during December, the fourth quarter and the entire 2016 calendar year. The Real Spend portfolios benefited in that environment due to their sizable allocation to equities relative to many other types of retirement income strategies, which typically emphasize fixed income heavily.

Inflation expectations rose significantly after the election, on signs that the next administration may seek to implement significant fiscal stimulus spending. The Fed’s 5-year breakeven inflation rate—a commonly used measure of future inflation expectations—ended 2016 at 1.9%, near its high for the year of 2% in early December. At its current level, the inflation gauge is up more than 0.60% in just six months.

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