Market update – December 2016

Donald Trump US ElectionNovember proved to be an eventful month for US equity markets as investors digested the news that Republican Party candidate Donald Trump had succeeded in beating Democratic party rival Hillary Clinton to become the next US President. Share prices around the world were initially unsettled by the surprise result, but subsequently rallied on hopes that Mr Trump will cut taxes, increase spending on infrastructure, and implement regulatory reforms.

Over November as a whole, the Dow Jones Industrial Average Index rose by 5.4% and reached a new all-time high, closing above 19,000 points for the first time. The S&P 500 Index and Nasdaq Index rose by 3.4% and 2.6% respectively and also reached new records during the month. Overall, investors’ appetite for riskier assets improved following the election and the financials sector was the best-performing S&P sector over the month as a whole. Industrials, energy, materials, and consumer discretionary stocks also generally performed well. In comparison, utilities and consumer staples performed poorly.

After months of speculation, the US Federal Reserve (Fed) finally increased its key interest rate at its December meeting. The members of the Federal Open Market Committee (FOMC) voted unanimously for the 0.25 percentage point increase that raised the Federal Funds rate to 0.50%-0.75%. Having reached near-zero levels in 2008, US interest rates have now risen only twice in the last decade.

The Fed’s decision was widely expected, and therefore reaction was relatively muted. The US dollar strengthened against the yen, the euro and the pound, while the price of gold and oil – which are both denominated in US dollars – fell in response.

An increase in rates indicates that the central bank is relatively sanguine about the outlook for US economic growth. The country’s economy has continued to grow; the labour market is strengthening, and the rate of inflation is returning to its target of 2%. The Fed expects the rate of unemployment to fall to 4.5% next year, while the economy is tipped to grow by 2.1% in 2017, 2% in 2018, and 1.9% in 2019. Fed Chair Janet Yellen cited “the considerable progress the economy has made toward our dual objectives of maximum employment and price stability”.

UK equities experienced a choppy November that was punctuated by political newsflow, with Brexit continuing to generate more questions than answers. The FTSE 100 Index fell by 2.5% during November while the FTSE 250 Index was flat over the month. Over the year to date, the best-performing UK industry sectors were industrial metals and mining, basic materials, industrial engineering, and oil & gas. At the other end of the performance spectrum, the worst performers were telecommunications, real estate, and general retailers.

Emerging markets were rattled by concerns that Mr Trump will fulfil his pledge to renegotiate trade deals and pursue protectionist policies. During November as a whole, emerging equity indices generally underperformed the broader global market, hampered in particular by poor performance from India and Brazil. India hit the headlines early in the month with the news that the Government had issued an overnight ban on the 500 and 1,000 rupee notes in a bid to curb corruption. The move triggered anger and long queues at banks as people rushed to swap their banknotes.

Meanwhile, in a move designed to cut down on capital outflows, China announced plans to curb outbound foreign investment and unveiled tighter checks on large outbound deals. The Shanghai Composite Index rose by 4.8%.

At the end of November, the members of oil cartel Opec (Organisation of the Petroleum Exporting Countries) agreed a cut in output of 1.2 million barrels per day. The cut will take effect from 1 January 2017. The price of oil surged in response: the price of a barrel of Brent Crude oil rose above US$50 for the first time in over a month.

Closer to home, house prices in Northern Ireland continued to rise in the third quarter of this year, but at a slower rate. Prices were up by 5.4% compared to the same quarter in 2015, although rose by just 0.8% compared to the second quarter of this year. The average standardised price, across all property types, is now just over £124,000. The biggest annual rise in the third quarter was in Antrim and Newtownabbey, where prices were up by 7.3%; the smallest was in Ards and North Down, where prices were up by 2.1%.

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