U.S. stocks advanced in the fourth quarter of 2016, lifting major indexes to record highs and resulting in strong full-year gains for many investors. It was the eighth consecutive year of positive returns for the large-cap S&P 500 Index. The catalyst for the rally was the early-November election of Donald Trump as the next U.S. president. This was a surprising result that sparked feverish buying, especially in sectors that could benefit from easier fiscal policies, including tax cuts and increased infrastructure spending, or from a friendlier regulatory environment. On the other hand, domestic bond returns were mostly negative due to a sharp increase in U.S. Treasury interest rates. Non-U.S. equities and bonds lagged their U.S. counterparts, as a stronger dollar versus most currencies reduced overseas returns in dollar terms. However, high yield bonds, which are less sensitive to interest rate movements, bucked the negative trend, helped by expectations for stronger economic growth in 2017 and strength among energy sector issuers.

We continue to believe that the global commodities market is in the initial years of a long-term secular down cycle, although there will be periods of cyclical disruption. In fact, we believe we are now in a period of cyclical disruption that is partly driven by OPEC's changed tune regarding supply management, as well as better recent economic performance. We expect this period of oil and commodity outperformance to be brief, as the market comes to grips with an anticipated supply response from U.S. shale. Although some market participants expect a return to higher prices, we expect oil prices to settle into a new long-term average in the USD $40 to $50 per barrel range. We note, however, that this ultimately depends on the degree to which technological innovation continues to improve productivity and drive down costs.

In 2016 we saw considerable volatility in the markets for commodities and high yield debt, with prices trading in wide cyclical range. We expect this volatility to continue, and we will make tactical portfolio adjustments as appropriate in the context of a secular down cycle in commodities. Although the opportunity set in the natural resources space has narrowed as commodities prices trend lower over time and balance sheets are pressured, we are still finding pockets of opportunity in several areas of the market:

•Majors/integrateds with clean balance sheets and a significant number of financial and operating levers to pull.

•Commodity-related companies that stand to benefit from declining input costs and growing demand from end markets, including specialty chemicals and packaging.

•Regulated utilities that can maintain durable growth in a low interest rate environment, with an emphasis on natural gas utilities.

•Companies with lower financial leverage and no hidden counterparty risk, given the bankruptcy potential in the commodities marketplace.

•Energy exploration and production companies that are able to cut costs and maintain growth, with North American shale producers among the best examples.

We remain committed to our bottom-up stock selection process and our philosophy of buying and holding a diverse selection of fundamentally sound natural resources companies with solid balance sheets and talented management. Our expansive global research platform continues to assist in identifying those companies that can provide long-term capital appreciation for our clients. Even if the near-term environment presents challenges, we believe the market will reward our disciplined and consistent approach to investing over the long term.