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Capital Market Review Fourth Quarter 2016 By Jack D. Kraus, CFA, Chief Investment Officer The broad market experienced another positive quarter adding to the market recovery from the lows in early February. The S&P 500 was up 3.8% during the quarter and is now up 7.8% for the six months. The nine-month return is a 10.5% gain and the trailing twelve-month return is 12.0 %. The S&P started the quarter off with a negative month and rebounded for the next two months to finish out the quarter. October saw a -1.8% decline followed by a 3.7% gain in November, the strongest month of the quarter. The S&P 500 gained 2.0% in December. The bond market saw negative returns for the quarter as rates rose on the expectation of higher inflation and expansionary fiscal policy. The Bloomberg Barclays Aggregate Index fell by -3.0% for the quarter. The index was down -2.5% for the six months and down -0.4% for the nine months. Performance for the trailing twelve months was positive, with the index gaining 2.7% Inflation, as expressed by the Consumer Price Index, was 0.0% for the quarter and up 2.1% for the year. STOCK MARKET The major market averages were mixed during the fourth quarter. The S&P 500, an index of large company stocks, was up 3.8%, while the Dow Jones Industrial Average climbed 8.7%. The Russell 2000, an index of small-company stocks, gained an 8.8% return for the quarter. The MSCI EAFE, an index representing international stocks of developed markets, fell by -0.7% in the quarter. The MSCI Emerging Market, an index representing the international stock of emerging countries, was down -4.2%. The Dow Jones US Select REIT, an index representing real estate companies, was down -2.5% for the quarter. The Bloomberg Commodity Index posted a positive return of 2.7% for the three-month period. The six- and nine-month periods saw mostly positive results. The S&P 500 Index was up 7.8% and 10.5%, and the Dow returned 11.7% and 14.0%. The Russell 2000 Index came in with an 18.7% return for the six months and 23.2% for the nine months. The MSCI EAFE Index returned 5.7% and 4.1%. The MSCI Emerging Markets Index returned 4.5% and 5.2%. The Dow Jones US Select REIT Index fell by -3.7% for the six months and gained 1.5% for the nine months. The Bloomberg Commodity Index fell by -1.3% for the six months and gained 11.3% over the trailing nine months. Returns were positive across all asset classes in the twelve-month period ending December 31st. The S&P 500 Index was up 12.0%, while the Dow returned 16.5%. The Russell 2000 Index saw the highest gain, returning 21.3% for the twelve months. The MSCI EAFE Index posted a 1% return, while the MSCI Emerging Markets Index rose 11.2%. The Dow Jones US Select REIT Index was up 6.7% for the twelve months. The Bloomberg Commodity Index had an 11.8% return for the twelve months. Market Returns 3 months ending 12/31/2016 12 months ending 12/31/2016 S&P 500 3.8% 12.0% Dow Jones Industrial Avg 8.7% 16.5% Russell 2000 8.8% 21.3% MSCI EAFE -0.7% 1.0% MSCI Emerging Markets -4.2% 11.2% DJ US Select REIT -2.5% 6.7% Bloomberg Commodity Index 2.7% 11.8% Equity Styles The Equity Styles were mixed for the quarter. Large Value gained 6.3%, leading Large Growth at -0.3%. The value/growth trend was the same for small companies with Small Value increasing by 12.2%, while Small Growth only gained 3.3%. The average International Equity finished the quarter with a loss of -2.3%, while Real Estate was again the worst performer, losing -2.6%. The six- and nine-month periods saw generally strong results. Large Value rose 10.2% for the six months, while Large Growth saw a 5.2% return. For the nine months, Large Value gained 13.2%, and Large Growth gained 5.8%. Small Value outperformed Small Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC. Page 1 of 5 Comparison of Equity Styles 3 months ended 12/31/2016 For the nine months, Mega Caps were up 9.3% and Large Caps 10.8%, while Mid-Caps returned 11.3%, Small Caps 23.2%, and Micro Caps 27.3%. 15 12 9 6 For the trailing one year, the return of Mega Caps was 10.4%, Large Cap 12.1%, and Mid-Cap stocks 13.8%. Small Caps had the strongest return gaining 21.3%, and Micro Caps gained 20.4%. 3 0 -3 Large Co. Value Large Co. Growth Small Co. Value Small Co. Growth Int'l EQ Real Estate Stocks by Sector Growth across both time periods, gaining 20.4% vs. 11.8% for the six months, and 23.0% vs. 16.0% for the nine months. International Equity was up 3.8% for six months and up 2.7% for the nine-month period. The average Real Estate manager lost -3.5% for the six months and gained 1.8% for the nine months. The Equity Styles were all strongly positive for the twelve months with Small Value being the leader and International being the laggard. Large Value gained 14.6% while Large Growth was at 3.2%. Small Value increased 25.8% while Small Growth trailed at 11.0%. The average International Equity finished the twelve months with a return of 0.7%, while Real Estate returned 6.6% Return by Market Cap 3 months ended 12/31/2016 10 8 6 4 2 0 MEGA CAP LARGE CAP MID CAP SMALL CAP MICRO CAP The trend for the three-, six-, nine- and twelve-month periods was smaller companies outperforming larger companies. All five of the market cap segments were positive for the quarter. During the quarter, the Mega Cap and Mid-Cap segments underperformed the broader market return of 3.8%, with returns of 3.5% and 3.2%. Large Caps gained 3.8%, matching the market as a whole. Small and Micro Caps were the strongest area during the fourth quarter with returns of 8.8% and 10.0%. The six-month period showed the same pattern as the quarter. Mega Cap stocks returned 7.0% while Large Cap companies were up 8.0%. Mid-caps posted a gain of 7.9%. The Small Cap Russell 2000 posted a gain of 18.7%, while the Russell Micro Cap Index was up 22.4%. 3 months ended 12/31/2016 25 20 15 10 5 0 -5 Financials Energy Indus Telecom Materials Cons Disc Tech Ulies Cons Healthcare Real Staples Estate The S&P 500 is now broken into eleven broad sectors with Real Estate being broken out as a separate sector from Financials. The sectors and their quarter-end weight in the index are as follows: Energy 7.6%, Materials 2.8%, Industrials 10.3%, Consumer Discretionary 12.0%, Consumer Staples 9.4%, Healthcare 13.6%, Financial Services 14.8%, Technology 20.8%, Telecom 2.7%, Utilities 3.2% and Real Estate 2.9%. Eight of the eleven sectors produced positive returns in the fourth quarter, with five outperforming the broad market. Financial Services was the strongest at 21.1%. Energy followed at 7.3% and Industrials at 7.2%. Telecom returned 4.8% and the final sector to outperform the market was Materials, returning 4.7%. The other positive, but underperforming sectors were Consumer Discretionary at 2.3%, Technology at 1.2% and Utilities at 0.1%. The negative performing sectors were Consumer Staples at -2.0%, Healthcare at -4.0%, and Real Estate at -4.4%. Over the past six months, six sectors were positive with five outperforming the broad market. The Financial Services sector rose 26.7% while Technology posted a 14.2% gain and Industrials returned 11.7%. The Energy sector returned 9.7% followed by Materials with an 8.6% gain. The Consumer Discretionary sector had a 4.4% return. Sectors that saw negative returns for the six months included Telecom and Healthcare, dropping -1.1% and -3.1%. Consumer Staples saw a -4.6% drop, and Utilities declined by -5.8%. The worst performing sector was Real Estate, falling by -6.4%. Nine of the sectors were positive for the nine months with five outpacing the broad market. The strongest performing sector was Financials, returning 29.3%, followed by the Energy sector which rose 22.4%. Industrials posted a 13.2% gain, and Materials returned Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC. Page 2 of 5 Stocks by Sector Cont. 12.6%. The Technology sector had an 11.0% gain, and Telecom had a 5.9% gain. Consumer Discretionary gained 4.4%. The remaining two sectors with positive returns were Healthcare and Utilities, gaining 3.0% and 0.6%. Both Consumer Staples and Real Estate had negative returns over the trailing nine months, losing -0.2% and -1.0%. All but one of the sectors were positive for the twelve months, with seven outpacing the broad market. The Energy sector increased 27.4% with a 44.8% increase in oil prices. Telecom and Financial Services also had strong returns, gaining 23.5% and 22.8%. Industrials posted an 18.9% return for the year, and Materials gained 16.7%. Two other sectors had double-digit returns, with Utilities gaining 16.3% and Technology gaining 13.9%. Consumer Discretionary gained 6.0%, and Consumer Staples gained 5.4%. Real Estate also had a positive return for the year, gaining 3.4%. The lone sector with a negative return for the year was Healthcare, falling by -2.7%. BOND MARKET A Trump victory in the November election led to higher rates across the yield curve with the anticipation of changes to tax policy and expansionary fiscal policy. Credit spreads narrowed during the quarter. The Federal Reserve decided to raise rates at their December meeting, the first and only rate increase of 2016 and a far cry from the Federal Reserve’s projection of four rate increases at this time last year. Rates across the yield curve are higher than they were a year ago across the board. 12/319/306/303/31 12/31 Treasury20162016201620162015 2 Year 1.20%0.77%0.58%0.73%1.06% Stocks by Region 5 Year 1.93%1.14%1.01%1.21%1.76% 3 months ended 12/31/2016 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 Please note that these returns are in U.S. Dollar terms, and the change in currencies will have an effect on the return. 10 Year 2.45%1.60%1.49%1.78%2.27% 30 Year 3.06%2.32%2.30%2.61%3.01% Bonds by Maturity 3 months ended 12/31/2016 2 USA Europe Lan America Japan Far East While the United States had a positive return for the quarter, the remaining four regions were negative, underperforming the return of the United States. The S&P 500 Index returned 3.8% for the quarter. Europe was down -0.4%, and Latin America fell by -0.9%. Japan lost -0.2% while the Far East, the worst performing region, lost -6.1%. The results were better for the trailing six months with all regions posting positive returns, though only Japan outperformed the United States. The S&P 500 Index returned 7.8%, while Europe returned 5.0%. Latin America gained 4.4%. Japan rose 8.4%, and the Far East increased by 3.8% for the six months. All regions had positive returns for the trailing nine months as well. Europe was the weakest region, gaining only 2.2%. The U.S. was the strongest region, increasing by 10.5%, and Latin American gained 10.0%. Japan increased 9.5%, while the Far East rose by 3.9%. All regions had a positive return for the twelve months except for Europe. The United States increased by 12.0%, while Europe fell by -0.4%. Latin America, the strongest region, increased by 31.0%. Japan was up 2.4%, while the Far East rose 6.2% 0 -2 -4 -6 -8 -10 -12 T-Bills BC Govt 1-3 BC Intm Govt BC Long Govt As rates increased across the yield curve, the maturity sectors of the bond market all had negative 4th quarter returns. During the quarter, T-Bills produced a 0.1% return, the Bloomberg Barclays Government 1-3 Year Index returned -0.5%, and the Barclays Capital Intermediate Government Index produced a -2.2% return. The Barclays Capital Long Government Index, which is the most sensitive to changes in interest rates, was down -11.5%. The returns for the six months were 0.1% for T-Bills, -0.6% for the 1-3 Year, -2.4% for the Intermediate, and -11.8% for the Long Index. The nine- and twelve-month returns were 0.2% for T-Bills, 0.0% and 0.9% for the 1-3 Year, -1.2% and 1.0% for the Intermediate, and -6.1% and 1.4% for the Long Index. Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC. Page 3 of 5 Bonds by Sector 3 months ended 12/31/2016 The Bloomberg Commodity Index was up 2.7% during the fourth quarter. The six-month return was down -1.3%, while the ninemonth return was up 11.3%. The Index returned 11.8% for the year. During the fourth quarter, Crude oil was up 12.6%, which pushed Unleaded Gas prices higher by 1.0%. Food was up with Corn rising 9.1% and Wheat increasing by 8.2%. Metals were mixed with Gold falling by -13.4%, Platinum down by -13.2%, and Copper gaining 13.4%. 2 0 -2 -4 -6 -8 -10 -12 BC Govt BC Mort BC Credit BC Muni BC High CWGVT Results were mainly negative across the bond sectors for all the time periods. This was a result of lower-to-steady rates and spread tightening coming from easing concerns of a slowing economy. The Government Index was down -3.7%, while the Mortgage sector was up 2.0% during the fourth quarter. The Credit Index fell by -3.0%. The Municipal sector was down -3.6%. The Bloomberg Barclays High Yield produced a positive return of 1.8% over easing credit concerns, especially in the energy market, which makes up a large portion of the high yield market. The World Government Index fell by -10.8% for the quarter. Six-month results were along the same lines with as the third quarter, with all sectors except for High Yield turning in negative results. The Government Index fell by -4.0%, the Mortgage Index was down -1.4%, and the Credit Index fell by -1.8%. Municipals fell -3.9%, while High Yield, the strongest sector for the six months, gained 7.4%. World Government fell by -10.3%. The nine-month period mostly followed the same trend with the Government Index falling -2.0%, the Mortgage Index down -0.3% and the Credit Index gaining 1.6%. Municipals fell 1.4%, while High Yield had a 13.3% return. World Government fell by -6.7%. The twelve-month returns were positive across all sectors. The Government Index showed a return of 1.0%. The Mortgage Index gained 1.7%, while the Credit Index gained 5.6%. Municipals returned 0.2%, while high yield rose 17.1%. World Government came in at 1.8%. COMMODITIES MARKET 3 months ended 12/31/2016 15 12 9 6 3 0 -3 -6 -9 -12 -15 Crude Oil Unleaded Gas Corn Wheat Gold Planum Copper The six-month returns saw mixed results. Oil was up 11.4%, and Unleaded Gas prices were lower by -5.6%. Corn was down -2.2%, while Wheat was up by 12.1%. Gold and Platinum were down -13.2% and -10.1%, and Copper gained 13.8% for the six months. The nine-month returns were mostly positive. Oil rose 45.5%, while Unleaded Gas prices were higher by 13.9%. Oil was up 44.8% for the twelve months with Unleaded Gas up 8.3%. Corn was off -1.3%, while Wheat rose 11.8% for the nine months. Corn was down -3.7% for the twelve months, while Wheat was up 10.7%. Gold was down -7.4% for the nine months but up 8.1% for the twelve months. Platinum fell by -8.0% for the nine months and gained 3.5% for the twelve months. Copper was the bright spot, gaining 14.5% and 17.5% for the nine- and twelve-month time periods. CURRENCY MARKET 3 months ended 12/31/2016 0 -3 -6 -9 -12 -15 EURO POUND YEN AUS$ CDN$ Foreign currencies fell against the U.S. Dollar during the fourth quarter. The Euro was down -6.2% against the U.S. Dollar for the quarter, -5.3% for the six months, -7.4% for the nine months, and -3.5% for the past twelve months. The British Pound continued to fall against the U.S. Dollar by dropping -4.9% for three months, -7.8% for the six months, -14.1% for the nine months and -16.6% for the year. The Japanese Yen fell in value by -13.5% against U.S. Dollar in the fourth quarter, -12.1% for the six months, -4.0% for the nine months and gained 3.0% for twelve months. The Australian Dollar, which is strongly influenced by commodity prices and the Chinese economy, Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC. Page 4 of 5 Currency Market Cont. saw its currency fall -5.7% during the fourth quarter, down -3.2% for the six months, -6.1% for the nine months, and -1.3% for the twelve months. The Canadian Dollar was down for the quarter, six, and nine months with a -2.2%, -3.6%, and -3.5% decrease, but was 3.2% higher for the twelve months due to the increase in oil prices. The information included herein was obtained from sources which we believe reliable. Past performance is not a guarantee of future results. Any mention of specific investments is not intended to be an offer of sale. Please refer to a fund’s prospectus for investment objective, risks, charges, and expenses before investing. For more information, contact your Allegheny Advisor. INVEST IN YOUR PEACE OF MINDSM 811 Camp Horne Road, Suite 100 • Pittsburgh, PA 15237 Ph: 412.367.3880 • Fax: 412.367.8353 • alleghenyfinancial.com Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC. Page 5 of 5