Quarterly Performance Update

Trump Win Swayed Stock, Bond Returns

Fourth Quarter 2016

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The U.S. election proved to be the defining event of the quarter, with the Republican sweep ushering in expectations for an improving U.S. economy. This outlook and its implications for growth, interest rates, and inflation triggered a rally among stocks and a sell-off among bonds.

Pre-election anxiety gave way to post-election optimism, and U.S. stocks and the U.S. dollar generated solid gains for the quarter. Most notable, U.S. stock benchmarks rallied to several record highs in the wake of Donald Trump’s November 8 presidential election victory, as expectations for the new administration to launch a pro-growth, pro-business agenda pushed stock prices higher. Favorable data on corporate earnings, durable goods orders, manufacturing, existing home sales, and consumer spending and confidence—along with an upward revision to third-quarter gross domestic product (GDP, a measure of the total economic output in goods and services for an economy)—contributed to the upbeat tone. The broad U.S. market (S&P 500® Index) advanced +3.82%, while small-cap stocks were even stronger, gaining +8.83% (Russell 2000® Index). Meanwhile, the U.S. dollar gained +7.11% against a basket of foreign currencies.

The response to the U.S. election results was vastly different in the fixed-income markets. The outlook for stronger growth, higher interest rates, and higher inflation weighed heavily on bond returns, particularly U.S. Treasuries. In addition, anxiety ahead of the Federal Reserve's (Fed's) December rate hike, along with the actual 25-basis-point increase and the Fed’s hawkish tone heading into 2017, contributed to the Treasury sell-off. All investment-grade bond market sectors declined, with Treasuries underperforming the broad investment-grade market, which declined -2.98% (Bloomberg Barclays U.S. Aggregate Bond Index). High-yield corporate bonds were the bright spot, generating positive performance largely due to a rebound in the energy industry and the high-yield sector’s correlation with stocks. Outside the U.S., bond returns were negative across the globe, with the dollar’s strength driving down returns for unhedged U.S.-based investors.

Non-U.S. developed market stocks (MSCI EAFE Index) generally followed the U.S. market higher. In addition to feeding off the optimism emanating from the U.S., stocks in Europe and Japan benefited from continued central bank stimulus and modest economic gains in their local markets. However, healthy returns for non-U.S. stocks translated to flat performance for U.S.-based investors (-0.71%), due to the dollar’s strength versus the euro, pound, yen, and most other currencies. Meanwhile, emerging markets stocks (MSCI Emerging Markets Index) declined in local currency and U.S. dollars (-4.16%), as rising U.S. interest rates and the rallying U.S. dollar pressured the asset class.

The opinions expressed are those of American Century Investments (or the fund manager) and are no guarantee of the future performance of any American Century Investments' fund. This information is for educational purposes only and is not intended as investment advice.

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Source: Bloomberg Index Services Ltd

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