2016 was a tale of 2 markets – the one before the election and the one after the election. Prior to the election the bond market (basis Barclays Aggregate Bond Index) was outperforming the equity market (basis S&P500). Also, within the equity market, sectors that are generally more stable and pay high dividends were performing better leading up the election than more growth oriented sectors. You can see this clearly in the following charts. The chart on the left shows the Barclays Aggregate Bond index rising consistently from January through October and then talking a sharp downward turn after the election. The chart on the right shows that Utilities, Consumer Staples (think soap and cereal) and Real Estate were all growing nicely prior to the election. Post-election these sectors fell out of favor as sectors such as Financials, Energy, and Industrials saw virtually all of the gains.
It was also a year where we saw improbables become reality. That started in June 2016 when Britain voted to leave the European Union. That was followed by the Republican sweep in the US elections. 2016 also saw Italians vote against a constitutional change that may have helped them improve their current economic condition.
Tailwinds – factors that should help the economy and the financial markets:
- Generally speaking, the US economy is in decent shape – unemployment is low, interest rates remain reasonably low, sentiment is generally optimistic.
- The Republican economic agenda of reducing taxes should put more money in consumer pocketbooks and business coffers should increase spending on consumer goods and business investment.
- Less reliance on monetary policy (the FED), with more fiscal stimulus (the Government) to help the economy is a more balanced approach.
- Reduced regulation should encourage a number of industries to spend on staff, research and development, and property, plant and equipment.
Headwinds – factors that could negatively impact the economy and the financial markets:
- Rising interest rates in the US which could lead to a stronger US Dollar. A strong US Dollar hurts many large businesses that generate much of their revenue and profits overseas. Also, higher interest rates often dampen economic growth.
- Nationalist/protectionist trade policies, could hurt companies and consumers alike by fueling high prices for goods and services (read: inflation).
- Europe still has to wrestle with massive immigration and socioeconomic issues. Britain has a 3/31/2017 deadline to begin their exit from the European Union. Also, there are major elections in France, the Netherlands, and Germany in 2017.
- Russia’s increasing presence on the geopolitical stage, and China’s increasing willingness to show military might introduce more geo-political uncertainty.
My overall outlook for 2017 is for the US economy to accelerate somewhat from current levels and for continued slow economic growth globally. I do not see any signs of recession in 2017 either at home or abroad. I expect interest rates to rise gradually from the current 2.4% range to the 3% range on the US 10yr Treasury. As for stocks, I anticipate we will continue to see the kind of volatility we have been dealing with for the past couple of years. The chart below shows the peak to bottom of the swings in the S&P 500 since September 2014 to just prior to the November 2016 election. While the swings have been dramatic the general trend is up. I expect the rollercoaster ride to continue but that the trend remains higher for stocks. My forecast is for the S&P 500 to grow by 4-7% in 2017, but some sectors/industries will do better while some will do worse. Therefore my focus is on identifying those that will do better.
I believe the best approach to your portfolio for 2017 is to remain invested, stay diversified, but be nimble in adjusting as conditions change.
January Calendar of Events (comments and additions for future months are always welcome)
- January is National Blood Donation Month. I’m donating on the 18th. How about you?
January 5th My granddaughter Isys turn 11. They grow up way too fast.
January 10th My better half, Eloise’s birthday.
January 15th the 7th anniversary of my independent practice – thank you to all my loyal clients.
January 16th Martin Luther King Day. Let’s pray for more racial tolerance and understanding.
I hope this information is helpful. Please share with family, friends, and colleagues.
Sources: Yahoo Finance, Stockcharts.com, CNBC.com, Morningstar