Fourth Quarter and Full Year Review
In a year characterized by the unexpected, maintaining a disciplined approach to managing your portfolio was our primary objective. During the unsettled economic environment that existed during the first half of the year, we used market volatility to rebalance your portfolio into the extreme sentiment we observed. In the second half, given the noteworthy risk the U.S. election presented, we chose to emphasize risk management first and foremost, and positioned portfolios conservatively.
Early in the year, equity markets suffered through a period of significant volatility as the economic outlook was impacted by many of the same concerns that carried over from 2015. These included slowing global growth, Chinese currency volatility and falling oil prices. We navigated this difficult environment by adding to equity during the first quarter when stocks experienced their worst start to a calendar year in history, and then reduced that excess exposure after the market had fully recovered in April.
By late June, the economic data was beginning to show signs of improvement and oil prices were finally on the mend. We felt these two factors would contribute to improving fundamentals in emerging markets, which had become undervalued following five years of underperformance relative to developed markets. We used the market pull back on the day after the Brexit result to add exposure to this asset class.
As the year progressed, global economic growth began to pick up, deflationary concerns declined, and signs of “good” inflation rose. It also became apparent that fiscal stimulus would likely be used more broadly around the globe in an effort to further support economic growth. These factors contributed to a meaningful shift in market sentiment and performance, triggering the so-called “Great Rotation” into stocks at the expense of bonds. The equity market delivered a positive return and bonds sold off as interest rates began to rise. We navigated this environment by taking a slightly different approach than we had used during the first half of the year. This included transitioning sector exposure within our equity allocation to more attractively valued areas such as the regional bank sector while reducing exposure to higher yielding sectors where valuations had become stretched. We also added to commodities based on our view that supply and demand of oil would continue to become more constructive over time.
During the fourth quarter, we recognized that no matter what the election outcome, the economy was on solid footing and corporate earnings were poised to recover nicely in 2017. The day after the election, we reduced our bond allocation, as well as the average maturity of our bond holdings. We also increased absolute return and added exposure to energy-focused equity. Equity markets followed their historical pattern and rallied during the post-election period as market participants generally took an optimistic view of the various pro-growth policies that may be implemented. Meanwhile, bonds experienced their worst quarter in 35 years as global interest rates rose.
As 2017 begins, the economic outlook is certainly brighter than it was a year ago. Global growth has exited its two-year lull and corporate earnings growth is rebounding considerably. While there are many reasons to be hopeful, we are also mindful of potential risks which may be driven by political events here and abroad. We will continue to prudently manage portfolios by balancing risk and reward, and look to take advantage of volatility to tactically rebalance portfolios to achieve our clients’ long-term objectives.
This information has been developed internally and/or obtained from sources that Sand Hill Global Advisors, LLC (“SHGA”), believes to be reliable; however, SHGA does not guarantee the accuracy, adequacy or completeness of such information nor do we guarantee the appropriateness of any investment approach or security referred to for any particular investor. This material is provided for informational purposes only and is not advice or a recommendation for the purchase or sale of any security. This information reflects subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. This material reflects the opinion of SHGA on the date made and is subject to change at any time without notice. SHGA has no obligation to update this material. We do not suggest that any strategy described herein is applicable to every client of or portfolio managed by SHGA. In preparing this material, SHGA has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you should consider, with or without the assistance of a professional advisor, whether the information provided in this material is appropriate in light of your particular investment needs, objectives and financial circumstances. Transactions in securities give rise to substantial risk and are not suitable for all investors. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.