U.S. Versus International
The S&P 500, an index of large U.S. companies, posted a total return of 3.8% for the 13-weeks and 12.0% for the full year ending December 31, 2016. U.S. stocks outpaced International for the quarter as measured by the All Country World Index ex-U.S. stocks, a representation of international stocks outside the U.S. Total return for the 13 weeks ending December 31, 2016 was -1.3% and year to date 4.5%.
U.S. stocks outpaced international by a strong margin in the latest quarter, as the election of Donald Trump signaled a strong U.S. nationalist shift in political leadership. Investor expectations are for policies that intend to benefit U.S. companies and potentially penalize non-U.S.
Japanese stocks were the lone positive standout, with the Nikkei 225 Average Index up 16.2% in the fourth quarter. Despite strong fourth quarter performance the Nikkei returned a small
0.4% for the full year. Prime Minister Shinzo Abe announced a 13.5 trillion yen fiscal measure on August 2, 2016, including cash payouts to low-income earners and infrastructure spending. Growth remains very low for Japan despite ongoing stimulus efforts.
U.S. Sectors
Top performing U.S. sectors for 13 weeks ending December 31, 2016, by total return included Financial Services (+19.0%), Energy (+7.3%) and Industrials (+7.1%). Laggards for the 13-weeks included Healthcare (-4.2%), Real Estate (-2.7%) and Consumer Defensives (-1.2%). Political interests played a large part in sector performance for the fourth quarter. Healthcare companies came under pressure as uncertainty regarding the future of the Affordable Care Act increased.
For the full year 2016, the top performing sectors included Energy (+27.9%), Communication Services (+20.8%) and Financial Services (+20.7%). Underperforming sectors included Healthcare (-3.4%), Consumer Cyclical (+5.8%) and Consumer Defensive (+7.0%). Recovering oil prices and prospects for pro-business political initiatives drove strong sectors.
Political initiatives in the first six months of 2017 will affect sector performance. Based on estimates gathered from FactSet, earnings growth expectations remain solid for many S&P 500 companies. Utilities and financial services companies are expecting solid fourth quarter earnings growth of over 10%. Telecom services expectations are weak, with earnings growth expectations of -28%.
Stock prices are at high values as measured by the trailing 12-month P/E. As of January 5, 2016 the S&P 500 P/E ratio is 20.7x, a level not seen since 2009 and significantly higher than the 5 year average of 16.5x. See chart below.