Dan Tersigni · January 20 2017
The global stock market gained approximately 5% in Canadian dollars in 2016. Like most years, it wasn't a smooth ride. Stocks started the year by dropping about 10% in January and February, and many commentators viewed this as the beginnings of a much deeper correction. Just as the negativity was escalating, however, markets started to rebound. They rallied through to the end of the summer, paused briefly in the fall, and then continued to rise after the U.S. election.
Stock returns also varied widely across the globe. Canadian stocks gained more than 20% while international, developed market stocks lost 2%. This was the reverse of what happened in 2015, providing a powerful example of why you should diversify and rebalance.
Real estate in North America ended the year with a 14% gain. That might come as a surprise to many people, who noticed how poorly it did in the second half of the year. Another reason to be aware of your reference point when evaluating performance.
Bonds were unremarkable in 2016. Interest rates fell during the first half of the year, so bond prices went up. Rates rose in the back half of the year so bond prices went down. All told, they came in relatively flat.
For most investors, what will stand out about 2016 were the political surprises in Britain and the United States - and the even more surprising market reactions to them. Neither Brexit nor President Trump were the outcomes expected by pollsters or markets. In both cases, markets initially reacted as many investors would have expected them to: they dropped sharply. But they found their bearings quickly and roared back. A month after Brexit, the global stock market was up 10%, and two months after the U.S. election, the global market is up a further 5%. Investors who bailed on their plan in a panic paid a steep price: this is why Wealthsimple is so adamant about drowning out the noise and sticking to your plan.
A Look Ahead
At Wealthsimple, we aren't big on making predictions. We don't have a crystal ball, and we don't think we can reliably predict short-term market gyrations. We're not convinced anyone else can either. But January is prediction season, so with our crystal ball (and healthy sense of skepticism) in hand, here are our thoughts on the year ahead.
The stock market will have a correction of 10% or more at some point during the year. This may sound like a bold or bearish call, but it's actually not; corrections of this magnitude are very common and happen on average once every two years. What may be surprising to some is that markets have recorded a gain in 57% of years with 10% corrections. Last year was one of them.
Investors will continue their long-standing asset allocation strategy of pouring money into what's recently done well. In 2017, that means flows to North American stocks will increase while flows to bonds and international developed market stocks will decrease.
Passively-managed exchange-traded funds (ETFs) will continue to attract significant new money. This is hardly a bold prediction as the trend already has significant momentum on its side: In 2016, ETFs around the world gathered close to $400 billion in inflows - a new record.
Canadian ETFs participated in this trend, adding 27% to their assets last year. They can look forward to continued momentum in 2017, buoyed by new rules requiring enhanced fee disclosures to clients.
Mutual fund managers will respond by cutting fees for their products. Some major players have already lowered management expense ratios and cut selling commissions. Expect more to come.
The one prediction we know won't be wrong is that the year ahead will bring many surprises. Events that aren't currently on the radar of investors will become the issues we talk about when reviewing 2017. As always, the best way to prepare for the unexpected is to stay diversified, low-cost, and disciplined.