A nostalgic look back at the notable market events of 2016

As December approaches, it is a good time to look back at some of the major market events of 2016 and the market reaction to those events. It was a particular newsworthy year with both the UK Referendum and US Elections occurring and causing significant market volatility. On top of these individual events, there has been a constant threat of higher interest rates in the US which kept investors guessing at every Federal Reserve meeting whether or not the board would raise rates. In Australia, we had two rate cuts this year, bringing the interest rate down to an all-time record low of 1.5%.

January Sell-Off   

It seems like a long time ago now but the first two weeks of trading of this year were some of the worst on record. Between the 4th and 20th January, the ASX 200 fell 7.4% from 5,296 to 4,903, a horrible start to the year. There was no proximate cause for the fall although the Fed had just raised interest rates in mid-December by 25 basis points and markets may have been nervous about further increases that were expected throughout 2016. As it happens, there were no additional rate increases and starting in late February, the stock market began a volatile march upwards. By May, the ASX 200 had recovered all of its January losses and started making new highs for the year.

UK Referendum   

In June, the UK held a referendum to decide whether or not to stay in the EU. Britain joined the European Economic Community (predecessor to the EU) in 1973 and most opinion polls between then and 2015 revealed that the majority wished to remain in the EU. The vote to exit the EU therefore came as a shock to a large number of people, and to markets. In the lead-up to the vote, the ASX 200 had been fairly volatile, with a trading range between 5,370 and 5,140 for the month of June. One the result became clear, however, the market dropped almost 3% in the space of a few hours. At the same time, gold prices surged and the British pound plunged. Common wisdom had it that this event would cause major upheavals in financial markets and investors were fleeing to safe haven assets (e.g. gold, bonds, cash) as a result. On the day of the result, the gold price as measured in British pounds rose by £150, a massive move for gold. If market prices were anything to go by, the world was headed for severe economic turmoil as a result of this vote.

Source: Rivkin, Reuters

As is often the case, markets had succumbed to fear and overreacted. The ‘risk off’ sentiment was short lived and ASX indices rallied strongly until August, reaching the highs of the year. The ASX 200 peaked on August 1, trading at a high of 5,611 and it stayed within earshot of this high for much of the rest of August. By September 1, the index was dropping and the first two weeks of September saw further declines. By mid-September, the index had come very close to breaking through 5,200, a 400-point decline from the highs. At the time, anticipation of a September rate hike by the Federal Reserve may have been spooking markets although there was no clear reason for the strong sell-off.

US Presidential Election 

With the US presidential election scheduled for 9 November, markets remembered what happened with Brexit and were treading very carefully. Any polls that indicated an improvement in Trump’s numbers would cause a sell-off in equity markets. Conversely, indications that Clinton’s chances had improved would see markets rally again. This kind of price action suggested that markets believed a Clinton victory would produce a better outcome for the stock market and the uncertainly of Trump’s policies would potentially be destabilising. In the week immediately preceding the election, markets had arguably become complacent and were assuming that a Clinton victory was virtually assured based on virtually all of the recent polling results suggesting she was ahead. Even betting agencies had Trump at odds of between 5-1 and 10-1.

The common saying that begins with ‘Fool me once… ’ is somewhat apt here. Trading for the day had started slightly positive for the ASX 200, up around 0.5%, and was holding at that level but as it became clear that Trump was going to win the election, the index went into meltdown. At one-point it was down 3% although it started to bounce towards the end of the day. At 4:10pm Australian Eastern Standard Time, the ASX 200 closed down 1.9% for the day. European markets were also showing heavy losses and it was widely assumed that US market would fall throughout the session that was due to open in a couple of hours. To their surprise, most in the investment profession woke up the following day to discover that the US stock markets had actually rallied and finished positive for the session. This was a major deviation from what was expected and appeared to be a classic case of a well-known investing adage ‘Buy the rumour, sell the fact’ (operating in reverse).

Since that day, equity markets have continued to rally although the ASX is not achieving the same level of performance as US equity markets at present. Typically, the ASX will remain highly correlated to the Dow and S&P500 but there is a gap in the relative performance at the moment. US equity market are currently making new all-time highs having rallied around 6% since the election result. The ASX 200, on the other hand, is still below its year to date highs and even further below its 2015 highs. Nevertheless, the recovery since the US election has been impressive, also rising around 6% from election day lows. 

Summary

With December still to come, there is potential for more stock market volatility. The Federal Reserve still has one last chance to hike US interest rates in the middle of December and markets will surely react to that one way or another. In Australia, higher inflation numbers have potentially put a dampener on the prospect of further interest rate cuts and therefore 1.5% may prove to be the low.

This article was written by William O’Loughlin – Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3600.