Fourth Quarter 2016 Market Letter

Surprise!


Once again the equity markets surprised investors, with the Standard and Poor’s

500 Stock Index rising 11.96% for the calendar year 2016. All the more surprising,

since pundits were unanimous in the opinion that a Trump election victory would

result in a sharp market decline.


Many studies have shown that attempts to time the equity markets have not proved

fruitful, as the penalty for missing the up market periods has been very difficult to

overcome. Excluding luck, the best long term equity returns have come from

remaining invested in stocks through the investment cycles. That remains our

strategy.


Looking forward to 2017, the prediction that seems safe to make is “that things will

be different”. The new administration has proposed some legislation that will be

attractive to labor and its democratic constituents (trade restrictions). Proposals

have also been put forward that will be attractive to republicans (tax reform).

These proposals should lead to new coalitions in congress, as the horse trading

begins for each side to pass its favored bills. This could well lead to an end to the

sharp congressional division we have experienced. It will be interesting to watch

the story unfold.


The economy continued to show strength the last two quarters, which encouraged

the Federal Reserve to make the long awaited move to raise interest rates. The Fed

has indicated that we should expect additional rate increases this year. The

strengthening economy bodes well for the job market and provides a favorable

backdrop for the equity markets.