Dow Jones 20,000

4Q 2016

Like age, a stock market milestone is just a number. There is nothing particularly special about Dow 20,000, except that it is a multiple of 10,000. In the early 1900s, investors celebrated milestones of every 100, or every 500, and later for every 1,000 that was reached. What used to be a big deal is no longer that momentous.

What Dow 20,000 really represents is growth – both in the US economy and the efficiency of the corporate sector – since the original publication of the index in the late 1800s. Some market watchers, however, are concerned that stocks above this figure represent “expensive” territory. We believe this to be overly simplistic thinking, based on only a round number. A closer look at valuation reveals that the broader US stock market (the S&P 500) is currently trading pretty close to its long-term average on most metrics. This gives us general comfort with current stock market levels both here and around the world.

Much of the recent strength propelling the market toward this milestone came on the heels of the US presidential election. While many people feared a Trump victory (including most markets while election night results were being revealed), as the days and weeks wore on, markets became more accepting of what this could mean in the form of loosening regulations and potentially more fiscal stimulus. Going into the election, the S&P 500 was +6.6% for the year. Since election night, it was up an additional 5.3% – resulting in a total year-to-date return of 12.0% – quite a performance for what looked to be an otherwise volatile year!

At the same time that large US stocks were performing well, we saw significant outperformance from smaller US stocks (the first time in three years). Small-caps ended +21.3%. Value stocks beat growth stocks handily for the year (+17.3% vs. +7.1%, respectively).

Internationally-speaking, the main story was the strength of the US dollar. While most international markets were trending higher, the strong US dollar resulted in muted overall (translated back into US dollar) returns for most developed foreign markets. To that end, the MSCI EAFE index was +1.5% in dollar terms. Emerging markets however, despite pulling back from their September highs, finished the year strong at +11.6%.

In the world of bonds, a sizable jump in interest rates generally depressed overall returns, with the Barclay’s US Aggregate Bond Index returning +2.6%. Additionally, municipal bonds were negatively impacted following the election on the idea that if Trump reduces personal tax rates, tax-free income streams may become marginally less attractive. Bucking the overall bond trends, however, were high yield bonds, which ended the year +17.1% on better economic growth and steadily improving corporate credit throughout the year.

It’s always hard to predict what a new President might ultimately bring to markets and the economy. But what we know is that sentiment has improved dramatically since the last quarter. The University of Michigan’s Consumer Sentiment Index jumped in December to its highest reading since January 2004. The Conference Board’s Consumer Confidence Expectations Index hit its highest level since December 2003. And US stock markets are hitting all-time highs. While all of these developments are positive for investors, we acknowledge that expectations can sometimes get ahead of reality, which can result in turbulence during the ride. As always, we remain watchful and ready to take advantage of any turbulent opportunities to rebalance and enhance long-term outcomes for clients.