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Markets Comments December 2016

Saying Goodbye to 2016

We are about to close the book on 2016 and it is time to reflect on what has been a difficult year for global financial markets. We have seen our fair share of scary headlines and doomsday predictions, but the actual results for the year might surprise you.

A Rocky Start

2016 kicked off with a bang. U.S. stock markets opened with their worst five-day start to a year, ever. The Dow dropped 6.2%, the S&P 500 fell 6%, and the Nasdaq dropped 7.3% in the first five trading days of the year. The Royal Bank of Scotland (RBS) issued a pessimistic report warning of worse times to come. So reads a headline from The Guardian on January 12th:

Sell everything ahead of stock market crash, say RBS economists

"The downside is crystallizing," says the RBS report. "Watch out. Sell (mostly) everything." According to RBS and other pundits, tougher times were ahead. A crash was just around the corner. That turned out to be a bad prediction and even worse advice. Despite the worst start to a year the stock market has ever experienced, the S&P 500 is up nearly 12% so far in 2016.

Britain Shakes Things Up

Then Brexit happened. Ahead of Britain's vote to leave or stay with the European Union, this May 13 headline from The Guardian captures the conventional wisdom leading up to the vote:

Brexit would prompt stock market and house price crash, says IMF

The managing director of the International Monetary Fund (IMF), Christine Lagarde, warned the stock market would crash if Britain voted to leave the EU. "We have looked at all the scenarios," Lagarde warned. "We have done our homework and we have not found anything positive to say about a Brexit vote."

Then, on June 23rd, 52% of British citizens shocked the world and voted to leave the EU. There was indeed an initial sell-off in stocks immediately following the vote. But by June 30th -- just a week after the Brexit vote -- the FTSE 100 closed at a higher point than where it stood prior to the Brexit vote.

Looking at 2016 as a whole, the reaction to the Brexit vote is merely a blip on the radar of the FTSE 100, which is now flirting with all-time highs. So much for that stock market crash.

Trump It Up

Then, of course, we come to the U.S. presidential election. These headlines speak for themselves:

The stock market could crash if Donald Trump is elected president (MarketWatch, November 1)

Citigroup: Stock Market Will Fall if Donald Trump Is Elected President (Fortune, November 5)

Simon Johnson, an MIT professor who wrote the MarketWatch article cited above, predicted that a Trump victory "would likely cause the stock market to crash and plunge the world into recession." This was the accepted, conventional, and (for the most part) undisputed assumption. Just as a Brexit vote was supposed to cause a stock market crash, so was a Trump victory.

Now, less than two months after the election results, U.S. stocks are hitting all-time highs. Even with the worst start to a year the stock market has ever experienced, and the surprising results with Brexit and Trump's victory, the S&P 500 has increased more than 10℅ in 2016.

Learning from 2016

There is always something to worry about. Whether we are talking about 2016 or any other year, you can be sure there will be countless predictions for why the stock market is about to crash and why you should not invest. No one knows what will come tomorrow or in 2017. Little good comes from predicting short-term movements. The events of 2016 and the subsequent performance of the stock market is a beautiful demonstration of the folly of letting short-term fears drive investing decisions.

As we close the door on 2016 and prepare for a new year, remember that despite all the pessimism, short-term volatility, and predictions for stock market crashes throughout the year, patient investors still came out ahead in 2016. Instead of trying to guess where the market is headed over the next week or year, we will continue to focus on making regular investments in businesses that we believe are poised to grow and reward patient investors over the long term. I know of no other approach that has generated lasting success for patient individual investors over the span of decades.

Thank you for following along with us in 2016. We are excited to turn the page and invest alongside you in 2017 and beyond.

Wishing you a wonderful holiday season with family and friends!

Zurich, December 22nd, 2016

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