US equity markets posted positive returns during 2016, with the S&P 500 index registering a total return of 11.96% in dollar terms, making the US the best-performing equity region globally.
While such an outcome is pleasing for investors, it masks the fact that 2016 was a volatile and challenging year for active managers despite the positive figures. It is also worth noting that most of the outperformance was generated in the last two months of the year after the presidential election.
Economic uncertainty in the first half of 2016 saw defensive and higher-yielding areas, such as utilities, telecoms, consumer staples and Reits, leading the overall market. For example, the telecoms sector delivered a staggering return of more than 32% (in USD) during that period, while more cyclical areas, namely financials, were in negative territory as expectations for a Federal Reserve rate hike were lowered.
Trigger point
This negative sentiment triggered a sharp sell-off in what are perceived as traditional growth areas, such as technology, but this trend also affected the whole asset class. US economic data and sentiment improved in the second half of the year, driving stocks and indexes to record highs, particularly after the election of Donald Trump.
From the election to the end of December 2016, nine out of 11 equity sectors within the S&P 500 traded higher, with value cyclical stocks the largest beneficiaries as Trump’s policies were interpreted by many as a shift from monetary policy to fiscal policy.
Financials was the best performing sector, driven by optimism surrounding the regulatory environment, expectations of higher interest rates and cuts to corporation tax. Other notable winners included energy, industrials and materials stocks as investors noted the potentially positive impact of infrastructure spending and faster economic growth. This trend has continued into 2017.
Added value
Value-oriented style investing outperformed growth in 2016, regardless of company size, though a large portion of those gains were made in the last two months of the year. Large-cap growth managers underperformed their value counterparts by nearly 10%, as measured by the Russell 1,000 Growth and Value indices.
In terms of market capitalisation, small-cap stocks were the standout overall last year, posting most of their gains after election day.
This is not surprising as smaller companies are viewed as an area that will benefit most under the new administration. As a result, the majority of the inflows we have seen since the market rebounded were poured into smaller company funds.
All the indications are that this year will provide a positive environment for equities and, based on the expectations of greater volatility and dispersion of returns between individual stocks, that it will be favourable for active managers.
It appears highly likely that the bull market that US equities have enjoyed for the past seven years will be extended.
