A summary of the market in 2016

At the end of 2015 the US Federal Reserve made its first rate hike in nearly a decade. Expectations then were that long-term rates had bottomed out and would continue to rise since the Fed planned further increases in 2016. The market reacted negatively, and at the beginning of the year long-term rates fell sharply alongside the global stock markets. As growth and inflation once again proved to be weaker than expected, the Fed had to withdraw its plans for interest rate increases, which caused the dollar to weaken and the market to stabilise.

Global GDP growth during the year was slightly weaker than expected, at just over 3 percent. The US was disappointing, while Europe was in line with expectations. China continued to grow at a slightly slower pace, and some of the weakest emerging economies, such as Brazil and Russia, have stabilised. Swedish growth was surprisingly positive, although it fell slightly during the year.

The drama during the year came from neither the economy nor profit growth, but from a series of political events and market reactions to them. The first major event was the Brexit vote in the UK, where opinion polls indicated that the remain side would win. The outcome was instead a clear vote to leave. This was repeated later in the year in the United States, and showed something that the polls were unable to pick up – the frustration of the languishing middle classes, criticism of widening income disparities and globalisation, and the major migration flows in the wake of the refugee crisis.

Brexit was a shock to the markets, with the world’s stock and bond markets falling sharply. Although many experts had predicted substantial real economic consequences the economy continued to perform positively, backed by expansionary central banks. Equity markets recovered after scarcely a week, and then continued to rise.

The second big shock was the US presidential election, with most commentators expecting Hillary Clinton to win. When it became clear on the morning of November 9 that Donald Trump had won, markets again reacted negatively. But this time it took only a few hours before they turned and continued to rise, and the gains continued for the rest of the year. The reason is Trump’s plan for expansionary fiscal policy, with tax cuts and infrastructure investments enabling intensification of US economic growth and corporate profits. As a result of Trump’s victory in the US election there was a significant migration of capital from defensive sectors to cyclical sectors, and from bonds to the stock market. It is difficult to predict trends in the market, but if interest rates continue to rise then this capital flow will continue in 2017. However, we would like to highlight that the uncertainty in the market also demonstrates the importance of having active management, which focuses on handling market trends and fluctuations in both the short term and the long term - for the client’s best interests.

Important Information
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