Year-End Surprises

2016 was filled with surprises (remember Brexit?), but it was the fourth quarter (Q4) which held three important and unexpected events:

The outcome of the U.S. presidential election. The election of Donald Trump shocked many Americans and, similar to Brexit, completely defied nearly all election polls.
Talking heads are wrong again. Commentators and analysts predicted Trump's win would cause financial markets in the U.S. to fall. In fact, a stock market rally occurred, pushing the Dow close to 20,000* by the end of the year.
A year-end rate increase. The Federal Reserve, after a year filled with much teasing, raised its key interest rate by 0.25%.

*I purposely used the Dow 20,000 event because I wanted to point out something I've never quite understood: The fascination with market milestones. Yes, it gives us a way to compare the Dow on, say, January 1, 2008, to the Dow on January 1, 2017 (12,800 versus 19,877, if you're interested). Everybody wants to see the market go up, but I believe it's more important to focus on your goals and your financial position in relation to them rather than an arbitrary number.

Q4 2016 Numbers

Q4 turned out to be good for U.S. stocks, but not so good for international-stock funds and bond funds.

The S&P 500, which is typically used as a benchmark for U.S. stocks, gained 3.82%. The average diversified U.S.-stock fund, which is a more appropriate measure of how investors actually invest, was up 7.1% during Q4.

International stock funds didn't fare as well as their U.S. counterparts. The average diversified international stock fund dropped by 2.6% during Q4.

The average intermediate-term, investment-grade debt declined by 2.7% during Q4.

Full-Year 2016 Numbers

Looking at the full year presents a brighter picture for the investment categories listed above.

The S&P 500 was up 11.96%, while the average diversified U.S. stock fund gained 10.8%. Those numbers are great considering we're 8+ years out from the last recession and we have yet to see a significant correction in the U.S. stock market. That said, I find it troubling that we've gone 8+ years without a significant correction.

If U.S. stocks roared during 2016, then international stocks whimpered. The average diversified international stock fund gained just 0.7% for the year.

Despite a Q4 decline of 2.7%, the average intermediate-term bond ended the year on a positive note with a gain of 3.0%.

The Year Ahead

So what's in store for 2017? I checked with my Magic 8 Ball and it said to ask again later.

I can't successfully predict what will happen to financial markets this year. No one can. It's true that financial markets have performed well since the election, but whether or not that continues depends on, among other things, policies put in place by the Trump administration.

Now that I've gotten that disclaimer out of the way, I believe the following sectors have the most potential for change in 2017:

Energy. Companies related to traditional forms of energy, such as oil and natural gas, will probably perform well under a government dominated by Republicans. Unfortunately, that means renewable forms of energy could be negatively impacted if government subsidies are reduced or eliminated. On the bright side, Elon Musk recently accepted an advisory position in the Trump administration. I trust his input will have a positive impact on energy policy as well as autonomous cars and AI.
Pharma/Health Care. President-elect Trump has already talked about finding ways to cut drug prices, which would be good for consumers but also negatively impact drug companies. On the other hand, regulatory cuts, which Republicans are known to champion, could actually help drug companies if it means they could speed up the time it takes to get drugs to the market.
Infrastructure. Spending on roads, bridges, and maybe even a Great Wall could be a boon to companies related to constructions and infrastructure development.
Defense. Republicans typically increase defense spending, so I expect companies in this sector to perform well.
Blue Chip Stocks. Large established companies could be positively impacted if corporate tax rates are reduced, as promised by President-elect Trump.

In addition to changes in the sectors listed above, I believe it's possible the Federal Reserve will once again raise the target interest rate - as long as the economy continues to improve.

Educated guesses, like the ones listed above, are the best I or anyone can do. What I can say for sure is that I'll stay on top of current events and adapt to whatever changes come our way in 2017. It'll be great.

Listening / Reading / Watching

Here's what has my attention right now:

Catching up on a backlog of periodicals such as The Journal of Financial Planning and Bloomberg Businessweek.
Finally getting around to finishing The Fireman by Joe Hill. If you like stories about a spore that causes spontaneous combustion in humans, then this story is for you! Hill is the son of Stephen King and he has inherited his father's knack for telling a twisted tale.