In 1973, Princeton professor Burton Malkiel wrote A Random Walk Down Wall Street, an influential book presenting the random-walk hypothesis: stock-market prices follow a succession of random steps and therefore cannot be predicted. Looking back at 2016, the year seemed to bring almost everything and often felt random.
But first, the numbers
- The Dow Jones Industrial Average gained 13.5%.
- The S&P 500 rose 9.4%.
- NASDAQ rose 7.5%.
- Energy was the top S&P 500 sector, up almost 24%.
- Financials jumped more than 19%.
- Telecommunications Services increased about 18%.
- Health Care fell 4.2%.
- Real Estate fell almost 1%.
How 2016 Started and Ended Were Dramatically Different
The stock market opened with its worst first five trading days of a year dating back to 1897. By mid-February, the market had dropped about 10%. It then roared back and finished the quarter up roughly 11% from the February low. For the next seven months, much happened but the market moved only about 2%. After the election, the DJIA surged about 1,600 points and finished near 20,000—a down-then-up year, or Random Walk.
The Big Winner in 2016 — Small Companies
The Russell 2000 produced a 21.6% return. Value stocks outpaced growth stocks by about 10 percentage points in the large-cap Russell 1000 and by about 20 percentage points in the Russell 2000.
U.S. markets outpaced other major markets:
- The MSCI Europe Index fell 4.8%.
- The MSCI Pacific Index gained 1.6%.
- The MSCI Emerging Markets Index gained 7.2%.
The Economy
- Unemployment declined, and the final week of 2016 was the 95th consecutive week with fewer than 300,000 new jobless claims—the longest streak since 1970.
- Consumer confidence increased.
- Company earnings and revenue began improving after five quarters of declining S&P 500 earnings.
- Oil stabilized after falling to $26 per barrel in February and roughly doubled from that low.
- The Federal Reserve raised its interest rate by a quarter point and signaled the possibility of three increases in the following year.
What Else Happened
The Brexit vote and Donald Trump’s election were among the year’s most significant surprises. Pollsters, journalists, and experts often predicted both the events and their market consequences incorrectly—two more points for the Random Walk theory.
So Now What?
Some observers argued that the seven-year bull market was aging and stocks appeared expensive by P/E, CAPE, and other measures. Others argued that low interest rates and expected corporate earnings left room for the bull market to continue.
As a financial adviser, I subscribe to the Random Walk hypothesis: equity markets rise over time, but predicting the path of those returns is next to impossible. Successful investing requires a long-term approach. Many people admire Warren Buffett, but few act like him. Successful investors set a plan and stick to it during good and bad times.
A well-thought-out plan provides comfort no matter who is president, what the Federal Reserve does, whether the United Kingdom leaves the European Union, or what other event comes from left field.
—Paul