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2016 Economic Review

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Published on Feb 10, 2017

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Despite the nice post-election rally to end 2016, it turned out to be downright average. That is if you use the S&P 500 Index as your yardstick.

If you go back to 1928, the average annual return for the S&P 500 (including reinvested dividends) runs just around 10%. 2016 turned in the year with the S&P 500 up 9.54% on a price return basis. Throw in the dividends and it was up 11.96%. The mid-cap and smaller company indexes were up over 20%. Since the bull market began in early 2009, we've been treated to eight-straight years of positive returns for the S&P 500 Index (dividends included), with six of those in double digits. That has a lot of investors wondering if we're near a top. I'll get there in a few minute... keep listening. Looking at the S&P 500 on a point-to-point basis, 2016 was a good year. However, point-
to-point masks some major intra-year swings. For the most part, 2016 can be broken down into four distinct periods.

1. The Recession Fear
2. A Recovery
3. Brexit and Its Aftermath
4. The DJT Rally

What's in Store for 2017?

Forecasting how stocks will perform any year is dicey business. Simply put, there are too many moving parts to the stock price equation, and each of those moving parts can affect one of the other moving parts. But it's always an interesting cerebral exercise to take a stab at some of the tailwinds and risks so let's do that, you know, just for fun.

Since WWII, the U.S. economy has had 11 economic expansions. At 73 months, the current expansion is the fourth longest, with the longest being 120 months. The current recovery isn't young anymore, but risks for a near-term recession in the U.S. are low. That's important for investors because these charts reveals that most bear
markets, defined as a 20% decline, since the late 1950s were associated with a recession.

In fact, the 34% Crash of 1987 and the 28% decline associated with the Cuban Missile Crisis in 1962 are the only two bear markets not associated with a recession. Worth noting is that each decline of 20% or greater is associated with at least one, if not more, of the flowing factors ñ a recession, a commodity spike, aggressive fed tightening and extreme valuations. You may want to take a second and pause on this chart from JP Morgan to see more detail.

The consensus is forecasting a return to S&P 500 profit growth in 2017, which would provide a tailwind for stocks. A gradual upward path in interest rates by the Fed would probably be viewed as a plus, especially if it were in response to an expanding economy.

Trump's election sparked enthusiasm, primarily because he has touted pro-growth policies and downplayed his more controversial ideas. For example, it's unknown if his tough trade talk during the election will result in dramatic new barriers to free trade or
whether his rhetoric is simply a negotiating ploy.

Of course, there are other unknowns. Will simmering problems in Europe or China bubble to the surface, or will unexpected geopolitical issues surprise investors? I'm not really sure but of course I don't think it should really matter to long-term investors.

Here's one of the best charts I've seen from 2016. It speaks for itself.

What we have seen during this cycle, which are basically problems abroad that have not had a material impact on the U.S. economy-- have created temporary angst, but have not
killed the current bull market.

Another way to view this? Those who have adhered to a long-range view and side-stepped the inevitable gyrations have profited.

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