For investors, 2016 was a year to bet big on America — and ignore almost everything else.
Global markets are closing out the year with U.S. stocks as the best-performing investments, except for a few outliers. Likewise, the dollar remains king of the world’s currencies, a boon for American purchasing power.
Here’s a look at some of the biggest winners, losers and laggards in financial markets as 2016 ends.
Winner: U.S. stocks
Earning double-digit returns this year was as simple as sitting tight with a diversified American stock portfolio — basically, the same strategy that has worked most of the time since this bull market began in March 2009.
The blue-chip-dominated Standard & Poor’s 500 index, the benchmark for many retirement accounts, was up 10% in price year-to-date through Thursday. Including dividends the return is 12.5%.
That followed the weak performance of 2015, when the index gained just 1.4% as doubts about the global economy’s health grew. Those same doubts rocked markets in January 2016, triggering a worldwide selloff that drove the Dow Jones industrials as low as 15,450.
But by late February, the bull market was off and running again, or at least walking briskly. The Dow was at 18,259 just before the election. Donald Trump‘s White House victory triggered another wave of buying amid the backdrop of his promises to boost economic growth and employment. On Thursday the Dow closed at 19,819.78, down 13.90 points for the day, up 13.7% for the year, and within 1% of the 20,000 mark.
What kept the U.S. market rolling up to new highs? Many analysts point to the same basic reasoning that has underpinned stocks since 2009: Interest rates are low, offering little competition; and although the U.S. economy is growing at only a modest rate, it still beats what much of the rest of the world is doing.
The big question for stocks in 2017 is whether the economy under Trump can live up to ebullient expectations — and if it does, whether that turns the uptick in interest rates in 2016 into something much more virulent.
Michelle Meyer, head of U.S. economics for Bank of America Merrill Lynch, said Trump’s ascendance “creates policy uncertainty unlike any in decades.” To put it another way, she said, “Things can go so right — and so wrong.”
Winner: U.S. small-company stocks
The hottest market action in 2016 was in shares of American companies that aren’t household names.
The Russell 2000 index, which tracks the 2,000 U.S. companies below the largest 1,000, is up 20% this year, double the S&P 500 price gain. Almost all of the Russell’s 2016 advance has come since election day.
By emphasizing U.S. economic growth over global growth, Trump’s “Make America Great Again” game plan plays to one element of smaller firms’ investment appeal: Many rely heavily or exclusively on domestic sales, in contrast to multinational companies.
Trump’s plan for tax cuts and business deregulation also could be particularly helpful to smaller companies. Overall, “small-cap companies pay higher tax rates than their large-cap counterparts,” said Burt White, chief investment officer for LPL Financial.
As small stocks zoom, however, so do the risks. Some investors consider the big-stock S&P 500 to be pricey, with the average stock selling for 17 times analysts’ 2017 earnings per share estimates. Yet, an S&P index of 600 smaller stocks now has a price-to-earnings ratio of 21 times 2017 estimates.
In other words, a lot of good 2017 news is already built into small-stock prices.
Loser/laggard: The IPO market
Although the stock market hit record highs in 2016, it failed to pull along the market for initial public offerings.
Just 105 private companies went public in the U.S. this year, down from a recent peak of 275 in 2014 and the fewest since 2009, according to IPO tracker Renaissance Capital. This year’s IPO deals raised a total of $18.8 billion — the least since 2003.
Uncertainty over the economy and the election caused many private firms to delay IPOs this year, Renaissance said. But the number of offerings should rebound in 2017, led by tech leaders Snap, Spotify and Palantir, the firm predicts. If Trump can deliver on his promises, it “should be stimulative to equity markets, new company formation and profitability,” Renaissance said.
Loser/laggard: Many foreign stock markets
In what has become a familiar pattern since 2009, foreign equity markets mostly struggled in 2016 as Wall Street hit record highs.
Europe was dismal, with the mood exemplified by Britain’s vote in June to leave the European Union. The Stoxx 600 index of European blue chips is down 1.5% this year.
Japan’s Nikkei-225 index is up a meager 0.6%, even though the long-suffering economy has shown surprising strength since midyear.
Winner: The U.S. dollar
Economics textbooks say a nation’s currency should reflect the relative strength of its economy. The dollar followed that logic in 2016, rising in value against most other currencies.
Late in the year, the buck got two more boosts — first from Trump’s election, then from the Federal Reserve’s decision to raise its benchmark short-term interest rate by a quarter-point, the first increase in a year. The Fed’s move underscored the idea that the U.S. economy was on solid footing.
The result: An index of the dollar’s value against key rivals, including the euro, yen and Canadian dollar, is at its highest level in 14 years. One euro now costs just $1.05, down from nearly $1.40 three years ago.
The buck’s strength gives American companies and consumers more purchasing power abroad, as U.S. tourists can attest. But there also is a downside in that U.S. goods become more expensive for foreigners.
Winners, then losers: Most bond investors
Rising confidence in the economy drove up short- and long-term U.S. interest rates in 2016. That hurt many bond owners, because higher rates on new bonds devalue older bonds that pay lower fixed rates.
The yield on the bellwether 10-year U.S. Treasury note ended Thursday at 2.47%, up from a record low of 1.32% in July. The yield hit 2.64% this month, the highest since 2014.
Yet most categories of bond mutual funds are still showing positive returns for 2016, according to data firm Morningstar Inc. One popular fund category, so-called intermediate-term funds, is up 2.85% for the year, on average, counting principal change and interest earned. Corporate junk bond funds, which tend to fare well in good economies, are up a hefty 13% this year.