As we near the end of 2016, it seems as if the year has been filled with events that took investors, global citizens, markets, and even sports fans by surprise. Some events presented challenges, others opportunity, and some, like the Chicago Cubs ending a 108-year drought to become World Series Champions, were cause for celebration. As we get ready to write the next chapter and close out the year, I look back at the rollercoaster ride that has been 2016:
Let’s start by focusing on the rocky start to the year. There were fears over a hard landing in China and the impact to global growth; oil was in a free fall; and a notable amount of uncertainty surrounding the Federal Reserve’s (Fed) rate hike plans – which at the time estimated four hikes during the year. January was a rollercoaster of volatility and in February we saw the VIX Index hit its highest point since the previous August. Those were challenging times and many investors were looking to thaw out from the bitter cold headwinds that had welcomed them into 2016.
Fast forward to March – we had made it through. And although we weren’t quite out of the woods at the time, it seemed as if markets and investors were thawing out. Oil prices rallied from previous levels to trade in a range; fears of a hard landing in China began to subside; and the market was able to recoup the majority of its losses. And for some asset classes, such as high yield, spreads went from an excess of 839 basis points mid-February to grinding inside 625 basis points by mid-March – illustrating the magnitude of the market rally.
After March, we seemed to hit our stride, or at least what felt like a stride. Markets seemed to be settling in, defaults were, for the most part, localized to commodity-related industries and appeared to have peaked, and a negative-yield environment in many countries supported positive supply/demand dynamics for credit. We saw positive flows into high yield and investment grade credit, and even emerging markets benefited from strong market technicals. But there still wasn’t enough stability for the Fed to raise rates and it was around this time the phrase ‘lower for longer’ was again embraced by many as a reality for the foreseeable future.
Then came June, or more specifically June 23, when the UK, in an unprecedented referendum, voted to leave the European Union. We said adios to stability as markets took a nose dive, equities entered a tailspin, and the global economy was shell shocked. Albeit the volatility associated with Brexit was short lived, the “leave vote” left many investors battered and gave the global economy a fresh new bruise.
Jaws dropped. Eyes went wide. And investors everywhere seemed to be signaling for a ‘time out’. Risk off was the name of the game – at least for the near term. However, and somewhat surprising given the magnitude of the leave decision on the UK and Europe, markets were quick to shrug off the decision and behaved in an orderly fashion. Credit spreads have continued to grind tighter and companies continued to take advantage of lower-for-longer rates to refinance their outstanding debt. Foreign investors sought out alternative investments, such as taxable municipal bonds, as many sovereign yields remained in low or negative territory. And this is the story we’ve been telling the past few months, until tomorrow, November 8, when we will flip the page.
As we count down the remaining hours until the 58th U.S. presidential election, I can on a small scale relate to Anthony Rizzo when he stated he was in a “glass case of emotion” during the 5th inning of game seven. Why, you ask? Because upon reflecting on 2016, I realize anything can happen – even those things you never, in 108 years, thought would.
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