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Quarterly Commentary, Q4 2016

Benchmark Returns for the Period Ended December 2016

Annualized
Quarter 1 Year 5 Year 10 Year
US Treasury Bills (one month) 0.06% 0.20% 0.06% 0.67%
Barclays Capital US Gov’t/Credit Inter Bond -2.07% 2.08% 1.85% 3.84%
Standard & Poor’s 500 3.82% 11.96% 14.66% 6.95%
Russell 1000 Value (large cap value) 6.68% 17.34% 14.80% 5.72%
Russell 2000 (small cap) 8.83% 21.31% 14.46% 7.07%
Morgan Stanley Europe, Australia and Far East (EAFE) -0.71% 1.00% 6.53% 0.75%
Wilshire REIT -2.28% 7.24% 12.02% 4.80%

Quarterly Commentary

The most recent economic report showed the U.S. economy advanced faster than initially anticipated, with an annualized 3.5% growth during the third quarter. This was the highest growth rate in over two years and higher than the 3.2% estimate. This strong showing was mainly attributed to strong consumer spending and business investment. Consumer confidence surged in December to the highest level since 2001, reflecting an improved economic outlook and jobs market. Unemployment continues to improve and is currently below 5%. These continued signs of strengthening, along with an increased expectation of inflation, resulted in the Federal Reserve’s decision to raise interest rates for only the second time since the 2008 financial crisis.

Domestic equities posted solid gains for both the final quarter and all of 2016. The Dow and S&P 500 enjoyed gains of 3.95% and 3.82% for the quarter and 12.25% and 11.96% for the year, respectively. Both small- and large-cap value stocks performed particularly well in 2016. The Russell 2000 was up 21.31% for the year with 8.83% of that growth coming in the fourth quarter. Large value stocks, as represented by the Russell 1000 Value Index, surged 6.68% during the fourth quarter and closed out the year up 17.34%. Due to prospects of rising interest rates and inflation, REIT was the only domestic category to perform negatively during the quarter, with a loss of -2.28%. Despite this, it still ended the year with a gain of 7.24%.

International sectors experienced dramatic volatility during 2016. For the first time in three years Emerging Markets, as represented by the MSCI Emerging Markets Index, ended the year in positive territory. Despite a fourth quarter loss of -4.16% the index gained 11.19% for the year, recouping three-quarters of its losses from 2015. The EAFE posted a -0.71% quarterly loss, but closed out the year up 1.00%.

Each year is historic in its own way, but 2016 threw an exceptional number of curveballs at investors. We saw Knowing what is going to happen is only part of the equation; predicting the actual market reaction to these events is even more daunting. To the surprise of many, the market experienced new record highs and the largest quarterly comeback since 1933. The stock market is the master of keeping investors humble.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment; therefore their performance does not reflect the expenses associated with the management of an actual portfolio. The index returns above assume reinvestment of all distributions. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.