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  Fourth Quarter 2016 Market Commentary

Economic Highlights

  See also:

 Wilshire Advisor Solutions 2016 Year in Review and 2017 Outlook Webinar REPLAY

GDP: Real GDP experienced an uptick during the third quarter, with the strongest report in two years, up 3.5% on an annualized basis. The main contributor was consumer spending, although each major segment provided net growth. Business investment was up slightly while inventories expanded after shrinking last quarter. The U.S. export deficit fell meaningfully, providing a sizable boost to growth. One product in particular, soybeans, experienced a surge in exports after a poor harvest season in Argentina and Brazil. Source: Department of Commerce (BEA)

Interest Rates: Rates moved higher across all maturities during the quarter, with the 10-year Treasury yield ending the quarter up 85 basis points at 2.45%. As expected, the Federal Reserve raised the Fed funds rate by 0.25% during their December meeting. They also pushed their year-end 2017 median forecast up another 0.25%, to a range of 1.25 to 1.50%. Source: U.S. Treasury

Inflation: Consumer price increases quickened during the second half of 2016. The Consumer Price Index was up 0.9% for the three months ending November and up 1.7% for the past 12 months. The 10-year breakeven inflation rate closed the fourth quarter at 1.95%, up from 1.60% last quarter, and has been below 2% since September 2014. Source: Department of Labor (BLS), U.S. Treasury

Employment: Jobs growth slowed during 2016 versus 2015, while total nonfarm employment increased by an average of 176,000 jobs per month during the three months ending November 2016. The unemployment rate moved lower to 4.6%, a level not seen since pre-crisis 2007. Source: Department of Labor (BLS)

Housing: Home prices have been moving higher in 2016, with the S&P Case-Shiller 20-city Home Price Index up 0.7% for the three months ending September 2016. For the past 12 months, the Index is up 5.1%. Source: S&P

The U.S. Equity Market

The U.S. stock market, represented by the Wilshire 5000 Total Market IndexSM, was up 4.54% for the fourth quarter and 13.37% for 2016. This marks the Index’s fifth straight quarterly gain and, more remarkably, eighth straight annual gain. A portion of that “winning streak” is due to a rebound from the global financial crisis selloff. However, the market has continued to produce strong returns after the initial recovery, with a 14% annualized gain over the past four years. Following several rocky months to begin the year, U.S. equities trended upward for the rest of 2016. The fourth quarter benefited from strong economic growth and signs of confidence from the Federal Reserve.

U.S. Equity

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire 5000 Total Market IndexSM 2.06 4.54 13.37 13.37
Standard & Poor’s 500 Index 1.98 3.82 11.96 11.96
Standard & Poor’s TSX Index (CAD) 1.66 4.54 21.08 21.08
Wilshire 4500 Completion IndexSM 1.80 6.46 18.54 18.54

U.S. Equity by Size/Style

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire U.S. Large Cap IndexSM 2.03 4.14 12.49 12.49
Wilshire U.S. Large Cap Growth IndexSM 1.27 3.90 8.97 8.97
Wilshire U.S. Large Cap Value IndexSM 2.79 4.38 15.44 15.44
Wilshire U.S. Small Cap IndexSM 2.19 8.30 22.41 22.41
Wilshire U.S. Small Cap Growth IndexSM 1.54 7.62 16.97 16.97
Wilshire U.S. Small Cap Value IndexSM 2.88 9.04 27.68 27.68
Wilshire U.S. Micro Cap IndexSM 4.98 8.97 17.86 17.86

During the fourth quarter, large cap stocks underperformed their small cap counterparts, with the Wilshire Large Cap IndexSM returning 4.14% versus a gain of 8.30% for the Wilshire Small Cap IndexSM. Small caps have generally performed better in 2016, posting a 22.41% return. The Wilshire Micro Cap IndexSM returned 8.97% for the quarter and 17.86% for the year. Growth stocks trailed value stocks during the fourth quarter and for the calendar year in both the large- and small-cap spaces.

Sector performance varied during the quarter. The best performing sector was Financials (+21.2)%, followed by Industrials (+8.3%) and Energy (+7.6%). The main laggard was Health Care (-3.6%).

2016 Yields and Inflation Expectations

2016 Yields and Inflation Expectations

Source: Federal Reserve

After trending downward for nearly three years, the 10-year Treasury yield pushed higher during the fourth quarter. A similar pattern has been evident in the 10-year breakeven inflation rate. Both shifts this year occurred largely after November 8. Whether it was the election results or the removal of an unknown that spurred the change is uncertain, the timing is unmistakable. It is worth noting that yields moved higher during the first half of 2015 as well, before retreating on concerns about global economic growth. The Federal Reserve increased the Fed funds rate in December to a range of 0.5% to 0.75%, just the second increase since effectively reaching zero at the end of 2008.

The Non-U.S. Equity Market

In local currency terms, equity markets outside of the U.S. were in mostly positive territory for both the fourth quarter and the calendar year. However, a strong U.S. dollar resulted in losses for U.S. investors. The European Central Bank announced that they would be buying fewer sovereign bonds per month than previously scheduled as part of their current quantitative easing, but extended the buying period to December 2017. Japan is also maintaining an accommodative stance with a negative overnight rate. Despite a strong 2016, emerging market equities suffered during the fourth quarter following the U.S. election as investors feared weakening prospects for global trade and diminishing exports from emerging market countries. Higher U.S. interest rates and a stronger dollar hurt returns as well.

Non-U.S. Equity

  USD (%) Local Currency (%)
MSCI AC World ex U.S. 2.56 -1.26 4.49 4.49 3.29 4.93 7.02 7.02
MSCI EAFE 3.42 -0.71 1.00 1.00 4.52 7.07 5.34 5.34
MSCI Europe 5.24 -0.41 -0.41 -0.41 5.79 5.43 7.23 7.23
MSCI Pacific 0.46 -1.03 4.18 4.18 2.48 10.16 2.26 2.26
MSCI Japan 0.97 -0.16 2.38 2.38 3.36 14.99 -0.74 -0.74
MSCI EM (Emerging Markets) 0.22 -4.16 11.19 11.19 0.14 -1.44 9.70 9.70
MSCI ACWI ex U.S. Small Cap 2.12 -3.52 3.91 3.91 3.03 3.20 6.34 6.34

The Fixed Income Market

After falling for much of the first half of 2016, U.S. Treasury yields reversed course and moved higher for the remainder of the year. The bellwether 10-year Treasury yield reached a historic low of 1.37% in early July before climbing to end the year at 2.45%, accelerating its rise after the November election. At their December meeting, the Federal Open Market Committee decided to increase their overnight rate by 0.25%, for only the second time since 2008. Credit spreads tightened during the quarter across both investment grade and high yield bonds. The move was dramatic enough within high yield to result in a net gain for the quarter, despite rising Treasury yields.

U.S. Fixed Income

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Bloomberg Barclays U.S. Aggregate 0.14 -2.98 2.65 2.65
Bloomberg Barclays Long Gov’t/Credit 0.73 -7.84 6.67 6.67
Bloomberg Barclays Long Term Treasury -0.53 -11.67 1.33 1.33
Bloomberg Barclays U.S. TIPS -0.10 -2.41 4.68 4.68
Bloomberg Barclays U.S. Credit 0.61 -2.97 5.63 5.63
Bloomberg Barclays U.S. Corporate High Yield 1.85 1.75 17.13 17.13

Non-U.S. Fixed Income

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Bloomberg Barclays Global Aggregate -0.46 -7.07 2.09 2.09
Bloomberg Barclays Global Aggregate (Hedged) 0.27 -2.34 3.95 3.95
Bloomberg Barclays EM Local Currency Government Universal -0.87 -6.05 2.45 2.45
Bloomberg Barclays EM Local Currency Gov’t Universal (Hedged) -0.80 -2.34 2.07 2.07
Citigroup World Government Bond Index ex-U.S. -0.97 -10.84 1.81 1.81
Citigroup World Government Bond Index ex-U.S. (Hedged) 0.37 -2.21 5.13 5.13

Real Estate/Commodity

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire U.S. RESISM 4.87 -2.20 7.62 7.62
Wilshire Global ex U.S. RESISM 1.72 -7.10 2.30 2.30
Wilshire Global RESISM 3.80 -3.88 5.79 5.79
Dow Jones UBS Commodity Index 1.80 2.66 11.77 11.77
S&P GSCI Commodity 4.72 5.76 11.36 11.36
Alerian MLP Index 4.39 2.04 18.31 18.31

The Real Estate and Commodity Markets

Real estate securities were down during the fourth quarter, both in the U.S. and globally. Commodities were up for the quarter as crude oil rose 11.4% to $53.72 per barrel, completing an already strong 2016. Natural gas prices were up with a gain of 28.1%, ending the quarter at $3.72 per million BTUs. MLP (Master Limited Partnership) returns were positive as the sector benefited from an agreement by oil producers that is aimed at balancing supply and demand. Gold prices were down and finished at approximately $1,152 per troy ounce, falling -12.6% from last quarter.


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This material contains confidential and proprietary information of Wilshire. It may not be disclosed, reproduced, or redistributed in whole or in part, to any other person or entity without prior written permission from Wilshire Funds Management.

This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice. Past performance does not guarantee future returns. This material may include estimates, projections, and other “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented.

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