was a delightful year for almost anyone with money in
the U.S. stock market and cruel to people who thought
they’d be safe with bonds.
Dow Jones Industrial Average came close to 20,000 after
breaking record after record for new highs following
Donald Trump’s election. Although the Dow lost some
ground in the last week, it closed the year at 19,762
and anyone with money in stocks or stock funds in their
401(k), IRA, college funds or other investments has to
be happy. Anything you had in a fund mimicking the Dow
at the beginning of 2016 grew by more than 13.5 percent
course, most funds don’t mimic the Dow so your results
could be somewhat different. More than likely, your
funds resemble the popular Standard & Poor’s 500
index. But that index was sweet to investors too. If you
are holding a Standard & Poor’s 500 copycat known
as an index fund, you are almost 12.5 percent richer
than at the start of 2016. That’s a gain that comes
from both the stock market’s 9.5 percent climb and
dividends paid by companies.
you were lucky enough or smart enough to invest in a
fund that picks small companies, rather than the
enormous companies that make up the Dow, you probably
have a whopping gain. The average mutual fund that
invests in smaller stocks is up 21 percent for the year.
full U.S. stock market of large and small companies —
or the Wilshire 5000 index — grew investors’ money
by about $2.7 trillion in 2016. That’s quite a gain
for any year and must be especially stunning for people
who thought in the recession of 2008 that they’d never
make money in the stock market again.
addition, 2016 was just one of the years that have been
benevolent to people with money in the stock market.
Since the scariest moments of the financial crisis in
March 2009, the stock market has climbed about 240
percent, giving people $20 trillion more than they had
while quaking in fear.
as kind as the stock market has been to investors during
the last two months, bonds turned nasty. If you glommed
onto bonds, hoping to keep your money safe, you
discovered during the last three months that bonds have
an ugly side. Bonds turn into losers when interest rates
are climbing and inflation expectations are picking up.
That behavior surfaced dramatically after the Trump
presidential election victory. Investors started to
expect that Trump will put a spark into the economy —
giving it the burst of growth and inflation that’s
been lacking since the recession. And whenever people
expect more growth and inflation bonds become losers.
the last quarter the average mutual fund that invests in
U.S. Treasury bonds lost about 7.4 percent and funds
that invest in top quality corporate bonds lost 3.5
percent, according to Lipper.
reason for these losses is simple, although often
confusing for people who assume bonds are always safe.
It comes down to this: When interest rates are rising
— as they have been recently — people don’t like
their old bonds, because they bought them at a time when
bonds paid disappointing, low interest rates. When
low-interest was the only game in town, people accepted
it. But who would want an old bond paying 2 percent
interest when new bonds become available and pay 3 or 4
percent interest? In such a situation, anyone with an
old bond can’t find someone to buy it, so the value of
the bond falls. Buyers won’t pay full price for it. So
your bond fund — full of the old, low-interest bonds
— loses money.
this continue in 2017?
are two possible views based on the sentiment that hit
the stock and bond markets after the Trump election.
popular view that drove the stock market high and hurt
bonds after Trump’s victory was that Trump will
stimulate growth, help corporate profits and lift
inflation through government spending. But for the stock
market to hold on to the gains and keep climbing Trump
other view is that the stock market could react poorly
if the economy remains in its lackluster state, and
Trump ends up looking like he won’t be able to deliver
the tax cuts, regulation cuts and infrastructure
spending that investors think will provide the spark to
the economy and corporate profits. If this happens, then
you will probably end up liking your bonds again.
will get discouraged if growth doesn’t get stronger,
or if Congress fights Trump on his plans. They could get
scared if Trump goes ahead with trade policies that look
like they are slowing down growth in the globe and
hurting the ability of U.S. companies to sell U.S.
products overseas. If positive expectations about Trump
turn into gloomy ones, then stocks could turn into
losers, because the people who bought stocks late in
2016 will decide they paid too much based on a hope that’s
not coming true. And if they get worried that Trump’s
not going to come through, or Congress will block him,
they might run for safety again into bonds. In that
case, bonds would no longer be losers. They’d gain
value, at least for awhile although the expectation is
that the Federal Reserve is on course to keep raising
rates in 2017.
are analysts expecting?
are good at examining companies and figuring out if
businesses have the type of operations and customers
that are likely to end up growing profits. Typically,
when profits are expected to rise, stocks do well. But
analysts are lousy at predicting politics. If you doubt
it, look no further than the shock over the Trump
victory and the expectation that the British people
would never vote to leave the European Union. Analysts
and pollsters were wrong. So beware about investing
based on 2017 Trump predictions.
the stock market jumped 6 percent in less than two
months after the Trump victory, economist David
Rosenberg of Gluskin Sheff described the rally as one
based on hope and faith. Since stocks are relatively
expensive now, anything that shakes faith is likely to
send stocks toppling from their perch. That doesn’t
mean a repeat of the 2008-2009 crash. That horrible
crash came from a financial crisis. But disappointments
on hope and faith can set off 10 percent corrections
when people think they overpaid for stocks.