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Fourth Quarter 2016 Market Report

A Conversation with Mr. & Mrs. C

Our Quarterly Market Report reflects a hypothetical conversation with Mr. and Mrs. C, long-time clients of Hefren-Tillotson. In this year-end investment review, we discuss the dramatic shift in market leadership and sentiment during 2016, spurred on by two unexpected events – Brexit and the U.S. Presidential election. Expectations are high heading into the New Year, much of it driven by anticipated policy initiatives. Can Trump and markets live up to expectations? Our review covers policy priorities and potential implications for the global financial markets along with recommendations on how to position portfolios.

Mr. C: This appears to be a timely year-end review given the results of the Presidential election and the markets response afterwards. Were you as surprised as me with the outcome?

HT: First of all, we are very grateful for your ongoing trust and confidence. We deeply value our relationship and will always do our best to serve your needs and help you reach the goals we have discussed over the years.

Few anticipated the election would produce both a Trump victory and a republican sweep. It was a grueling, highly contested campaign for the candidates and the country, which encompassed much negativity. There seems little doubt the U.S. electorateis as divided as ever following the race. I am hopeful we can put negativity behind us and work together toward shared goals that will benefit our great country. Our democratic process can appear messy, but it is hard to argue with the results over the past 240 years. One thing to keep in mind going forward is the market is politically agnostic and will judge the effectiveness of the policies put forth.

Mrs. C: I had expected the markets to fall after the election, but I guess it was a year with many surprises.

HT: There was certainly no shortage of drama this year. The election was a continuation of several twists and turns. If you remember, we kicked off 2016 with the worst correction to start a new year in U.S. market history. The 10% sell-off during the first two weeks was caused by worries of the Fed raising interest rates, an ongoing collapse in oil prices, and concerns about a

growth slump in China. As the Fed softened its rhetoric in response to market conditions and recession fears ebbed, markets rallied through mid-year while interest rates fell to record lows. Investors seemed to embrace a low-to-no growth world whererates would remain low indefinitely.

Along came “Brexit” at the end of June, the U.K.s surprise decision to leave the EuropeanUnion after 43 years of membership. The referendums result was not anticipated by pollsters and caught the world by surprise. Markets experienced a knee-jerk sell-off immediately following, but in the process, set the stage for a much different investmentenvironment in the second half of the year. Companies sensitive to the pace of economic growth began to outperform despiteconcerns Brexit raised about the world economy, which was already struggling to grow. Value stocks rebounded after lagging for much of the time since 2007 and interest rates rose from record lows.

In November, the world was surprised again by U.S.election results. Like you, many had expected a sell-off if Trump won, but his conciliatory victory speech and pro-growth agenda continued conditions in place since Brexit, while certainly adding new wrinkles for investors to comprehend.

For the FULL report, please download the PDF version.

Investment Advisory Team

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