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high yield problems, and U.S. consumers who might never spend their savings at the pump. All
these worries hit at once in January and February, prompting the S&P 500 to fall over 10% from its
2015 closing level of 2043. The year, at that point, appeared bleak.
Our view was to maintain a balanced and diversified position throughout the downturn, particularly
for the long haul, due to our belief that the major concerns, although understandable, were simply
not going to fully develop and asset prices would begin to track fundamentals more effectively
through the remainder of the year. The potential for risk assets to climb higher was there but a
catalyst was needed. For our full view on the year ahead, please read our December 2016 Monthl
Letter.
Exhibit 1: Mid-Cycle Slowdown Ended in Early 2016,
When Oil and Dollar Stabilized)
Source: EMVCME; FRB/Haver Analytics, Data as of December 5, 2016
!
Past performance is no guarantee of future results.
Our core belief was centered on healthy consumers who would indeed pick up their spending from
savings at the pump and become more confident as job growth continued and real incomes
increased. We also believed U.S. financial conditions and the economic backdrop would improve in
the second half of the year as the pressure from the strong dollar subsided and the deflationary
effects of the collapse in oil prices began to fade. In other words, we were witnessing evidence that
the mid-cycle slowdown that had hurt economic growth and corporate earnings was ending. [See
Exhibit 1] Based on this core belief, the “grind it out” year for risk assets would be back on track,
the business cycle would extend into 2017, bond yields would slowly shift higher, and equity
markets had the potential to head toward previous highs.
A series of unexpected outcomes
At this point, we did not characterize 2016 as The Year of the Unlikely. However, if you consider
specific events throughout the year in finance and sports, it is easy to see that now. We already
mentioned the second plunge in oil prices to the mid-$20s per barrel to start the year, and bond
markets in some areas of the world actually had negative yields—meaning the lender paid the
entity issuing the bonds to take their money! This was unlikely. How about Brexit vote in Great
Britain? Unlikely. In sports, Villanova University winning the national championship in men’s
college basketball (Nova’s first championship since 1985), Leicester—the English football club—
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