From Gloom to Bliss and How it Happened

It was an eventful 2016 with many investors worrying about the state of the market in January and then absolute bliss post-Trump election. We will review this year’s top stories and what impact it had and could have in the future.

Some memorable events in 2016 were…

• China’s manufacturing triggering a mass worldwide sell-off in early 2016.
• The infamous BREXIT where the majority of the United Kingdom decided to leave the European Union.
• An underdog celebrity candidate became the next elected U.S. President and which promises vows to keep.
• Oil’s recovery and OPEC providing a glimmer of hope to capping production after a disastrous 2015. Lastly, the vote of confidence from the Federal Reserve in the way of raising rates by 0.25% round-up our major headlines.

Though it seems like a lot transpired in 2016, it is a standard year with its ups and downs and 2017 may not be so different.

We hope you enjoy the year-end review and if you have any questions, please do not hesitate to ask us.

Let’s see how the markets have done in 2016.

The most notable developments this year have been the following:

Canada

Canada’s economy had a tough time in 2016 despite the rise in the national stock index. Energy and materials lead the way recovering some of their losses from 2015. However, near the end of 2016 we saw more positive numbers come out for Canada as unemployment fell and exports rose to recent highs. If oil prices continues its upward climb, we can see better results in 2017.

• This year’s best performing sectors are Energy, Basic Materials, Industrials and Financials. The first two recovering some of their losses and the latter benefiting from the weak Canadian dollar.
• The Canadian Dollar slightly weakened this month against the US greenback to $0.744.
• Oil prices rose this month from $49.44 to $53.72. Finishing up nearly 45% for 2016 with OPEC’s proposed production cuts giving it a boost near the end of the year. The world now waits to see if the cuts will be enforced while non-OPEC countries continue to ramp up their production.
• Unlike our U.S. counterparts, the Bank of Canada did not adjust their overnight lending rates in 2016 as they remain at 0.50% while the bank rate remained at 0.75%.
• Canada’s real estate market continues to be hot across most of the major markets, but particularly Toronto and Vancouver. However, we have seen a bit of a slowdown in Vancouver as of a result of the implementation of a 15% foreign buyer’s tax by the BC government.
• The Federal government also had its say on the hot real estate market as the Finance Minister proposed changes to mortgage lending in order require Canadians that have less than a 20% down payment to qualify under more stringent requirements.
• Canada’s unemployment rate fell for the year, as it started at 7.2% and ended at 6.9%, with Quebec and BC gaining the most jobs as of late.

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United States

The U.S. has been leading the charge with the global economic recovery story in 2016. The Federal Reserve confirmed the positive momentum by increasing rates by 0.25% in December and providing more aggressive targets in 2017. All 3 of the major stock exchanges posted new highs for the year as a result. Unlike the stock market, the bond market had a difficult time at the end of the year. The biggest headline in 2016 has been the election of Donald trump as the next U.S. President.

• This year’s best performing sectors are Energy, Financial, Telecommunications and Industrial.
• Donald Trump was elected the next US President in one of the most opinionated elections in recent memory. See our article on our website lkwealth.ca for a break-down on how it could affect the global economy. Overall, despite some of his unfiltered comments, we like the idea of a business man running one of the largest economies in the world from a financial growth perspective.
• The US dollar surged, as the trade-weighted (Relative to All Currencies) US dollar is at an all-time high, this can be attributed to a faster than expected raising of interest rates which is inverse to the rest of the world.
• With all the positives in the market, gold had a bad year in comparison as it tumbled drastically since Trump being elected. It was as high as $1,377.50, but finished the year at $1,152. Still positive 8% for the year overall. If the economy continues to get better and Trump follows through with some of his promises, it may keep the pressure on gold to stay low. If he falters, then you should see a fast rally to the upside.
• In 2016, the U.S. economy continued on its upward trend and employment numbers continued to rise. Toward the end of the year we saw a rise in full-time employment versus part-time which was a concern in 2015 and early 2016.
• As a result of the positive signs in the economy, the Federal Reserve decided to increase the Fed’s Fund Rate by 0.25% in the month of December. It was highly expected and thus it did not create any instability in the markets. The Fed has outlined a more aggressive outlook for 2017 with the current rate at 0.5%.
• Healthcare remained one of the major under-performers in 2016. Hillary Clinton kicked it off by using Twitter to promise to reform the Pharmaceutical space. Once Donald Trump got elected, his primary focus was to reform Obamacare. Depending on what transpires in 2017, it may be a space to watch.

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Global

At the start of the year, China caused massive panic across the entire world when their stock markets faced massive selloffs and was shut down for 2 consecutive days as a result. Investors sold off their riskier assets and waited to see the impact it had. Later in the year, another major event happened as England voted to leave the European Union (BREXIT). The markets went down for 5 days and then rebounded and continued to rally. However the British Pound and Euro has fallen drastically from that day. Italy tried to have its own referendum, but the people heavily voted to stay within the European Union. All in all, the global economy seems to have finally picked up steam in the second half of 2016 and should continue into 2017.

• China’s market saw a huge sell off in January of 2016 as their domestic markets continued to come off its highs in 2015. It took a few months before the dust settled and the world stopped being fearful of what a slowing Chinese economy meant to the rest of the world. Though a very important country to the world, the knee jerk reaction at the beginning of the year was not warranted as China posted better than expected annualized growth numbers at the end of the year.
• India’s government declared all 500 and 1,000 Rupee notes worthless in November. The country of 1.25 billion people happens to be a largely cash economy, so the Prime Minister made a surprise announcement to help stop corruption, counterfeiting and black market commerce. This will also increase the number of people that will have to start paying taxes for the very first time.
• In November, OPEC decided to cut oil production by 1.2 million barrels per day in a resolve to boost prices. Saudi Arabia will be taking most of the brunt of the cutting. There was speculation that the proposed cuts could not be enforced, but by the end of 2016 we are already receiving some numbers that may show signs of countries following through with cutting oil production.
• England voted to leave the European Union, shocking most analysts around the world. The exact impact won’t be known for a while, but we have already seen the British Pound lose 28% of its value versus the U.S. dollar. The biggest risk for England is that a large number of international companies decide to move their offices to another country and cause a rapid rise in unemployment.
• European Central Bank (ECB) cuts Eurozone interest rate to 0% to help jumpstart the economy earlier in 2016. It then announced that it had no plans to extend any further stimulus (as the existing program expires on March 2017)
• Japan continued to fight against stagnation and implemented new measures to fight deflation rather than getting deeper into negative interest rates and stimulus packages.

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Eye on the Month Ahead

• Will the Canadian economy improve enough to start raising interest rates in 2017 to keep up with the U.S. dollar and what affect will it have on our housing market?
• What impact will Donald Trump have on Canada if he decides to rip up NAFTA?
• As Trump gets closer to his inauguration, we will be on alert to see who he is appointing in key areas that may affect the economy and what policies look more likely to be at the fore front of his first 100 days in office. We do like that he is appointing business people instead of traditional politicians to key positions in his cabinet which should create a favourable business environment.
• Saudi Arabia is taking the lead on the OPEC oil cut initiative and we have started to see some progress, but we are ways away. Will the U.S. continue to increase their rig count and create more over supply?

We continue to believe that a globally balanced portfolio is the best approach. Equities favoured over fixed income as bonds enter into a difficult long term environment. We favor the US over Canada as the U.S. economy continues to outpace ours and if they continue to raise interest rates this would lower the Canadian dollar further.

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Economic Calendar

Thank you,

Konrad, Justin and Merriel

Disclaimer: Echelon Wealth Partners Inc. is a member of IIROC and CIPF. This document has been prepared as a monthly market update and does not contain any recommendations for any particular investment. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any investment decision should be based on your own risk tolerance and investment objectives and reviewed with an investment advisor. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. The data used in this document is from various sources and is believed but in no way warranted to be reliable, accurate, complete and appropriate.

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