Fourth Quarter 2016: Trump and the Fed Make Yields Great(er) Again
November’s election of businessman Donald J. Trump to the US presidency sent markets in distinct directions during the fourth quarter. Notably, the election surprise resulted in upward movement of US interest rates, the US dollar, and, after an initial overnight blip, US equities. Not all industry sectors were affected uniformly. Investors betting on a roll-back of regulations pushed financials, industrials, and the energy sector upward, while healthcare finished down for the quarter and the year. Small cap equities continued to rally, finishing the year up over 20% while their larger counterparts gained over 10%.
Trump’s election, combined with a Fed rate hike, the upcoming expiration of Janet Yellen’s term as Fed Chair, a steadily growing economy, and the increased likelihood of fiscal stimulus from a unified government pushed Treasury yields and inflation expectations notably higher. Still, yields ended 2016 approximately where they began it. The Bloomberg Barclays Aggregate Index returned 2.6% – roughly its coupon – for the full year. As inflation neared the Federal Reserve’s 2% target, Janet Yellen announced the Fed’s second rate hike since the financial crisis in December. Fed watchers will be paying close attention to the Federal Reserve public communications as various Congressional reforms take shape in 2017, and Yellen’s term ends in January 2018.
The president-elect’s campaign platform of renegotiating trade deals and tariffs on imported goods weighed on international currencies, whose declines caused negative returns for international equity markets in the quarter. In local currency terms, both developed and emerging international markets rose in 2016, as commodity prices rebounded, China’s economy appeared to stabilize, and Europe continued to recover from its economic malaise (every European country posted positive GDP growth in 2016). International bond yields rose alongside US Treasurys as 10-year German and Japanese bonds both returned to positive territory during the fourth quarter.