Despite Wall Street's worst start to a year ever, the U.S. stock market bounced back and posted solid gains in 2016, with small stocks leading the charge higher in a rally that gained steam after Donald Trump was elected president on Nov. 8.
Heading into the final day of trading in 2016, the benchmark Standard & Poor's 500 stock index, which is filled with America's largest companies, was up 10% for the year, despite kicking off the first week of 2016 with a 6% drop and sinking as much as 10.5% at its low for the year in mid-October.
(All the major U.S. stock indexes were showing mild losses in Friday trading, with the S&P 500 off 0.3%.)
The big winner in 2016 was the small-company Russell 2000 stock index, which has gained 20%. The small-cap index got a huge lift after Election Day, surging more than 14% as investors began to price in what they believe will be a better outlook for smaller, domestically focused U.S. companies under a Trump administration.
So-called "Trumponomics," which has an "America First" focus and includes plans to cut corporate taxes, reduce costly business regulations and spend heavily on rebuilding aging U.S. infrastructure, is seen as a boon for small U.S. companies. Small-fry firms also do less business abroad, which reduces their risk in the event a global trade war breaks out due to potential Trump policies that could impede free trade across borders.
Wall Street also cheered a 13.7% return for the blue chip Dow Jones industrial average and an 8.5% gain for the technology-dominated Nasdaq composite.
One highlight of 2016 was the Dow's late-year flirtation with the 20,000 milestone. Despite coming within 13 points of Dow 20,000 on Dec. 20, the 120-year-old stock gauge kicked off the final day of trading at 19,819.78, or 180 points shy of Dow 20K.
The gains in 2016 followed full-year declines a year earlier for the Dow, S&P 500 and Russell 2000.
Here are 2016's key market drivers:
1. Market avoids a major dive. The massive selloff to kick off the year totaled up to a loss of 10.5% for the S&P 500 at its low point in mid-February. And while that dive marked an official "correction," or drop of 10% or more, it never snowballed into a dreaded bear market, or plunge of 20% or more, despite a rare call by RBS (Royal Bank of Scotland) on Jan. 11 to "sell everything" and a Jan. 13 prediction from mega-bear Albert Edwards, global strategist at Societe Generale, that the S&P 500 could decline 75%.
2. Fed dials back rate hikes. After the Federal Reserve hiked interest rates in December 2015 for the first time since the Great Recession, 2016 was supposed to be the year of Fed rate hikes. The Fed, itself, thought four hikes were possible in 2016, and Wall Street figured three rate increases were possible. However, due to international and market turbulence early in the year, coupled with slower-than-expected U.S. economic growth in the first half of 2016 and fears the June Brexit vote might upend markets, the Fed ended up hiking rates just once in 2016. And that lone rate hike did not come until its final meeting of the year on Dec. 14. The Fed's patience and a continuation of low borrowing costs, enabled both the economy and stock market to regain momentum.
3. Economy, profits bounce back. The U.S. economy downshifted in the first half of the year, with GDP growing at a 0.8% rate in the first quarter of 2016 and 1.4% in the April-thru-June quarter. But growth picked up to 3.5% in the third quarter. Similarly, a four-quarter streak of negative earnings growth (dubbed an "earnings recession) was also snapped in the July-thru-September quarter when S&P 500 company profits grew 4.3%, according to earnings-tracker Thomson Reuters. The dual rebound in GDP and corporate profitability boosted investor sentiment as it took off the table fears of an imminent recession.
4. Investors shrug off Black Swan events. Nobody expected Britain to vote to exit the EU, but Brexit happened, causing a short-lived market crisis. Similarly, no one thought Trump would beat Hillary Clinton in the race for the White House, but he did. But that market shock – the Dow plunged nearly 1,000 points in after-hours futures trading on Election Night – only lasted a few hours, as the Dow finished up 73 points in the first trading session after Trump's Nov. 8 win. In both cases, worst-case scenarios of economic and market tumult were overshadowed by more stringent analysis that quickly concluded that worst-case fears were overblown.
5. Business-friendly Trump wins election. The stock market, which once feared a Trump presidency, has rallied sharply since the billionaire businessman's surprise win. The so-called "Trump Rally" has been driven by a belief that the president elect's business-friendly policies will be a major boost to the economy and, most important, corporate profitability. Trump's win not only boosted the mood and optimism of investors it has also coincided with the highest level of consumer confidence in 13 years. The Dow rallied 8.1% after Election Day.
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