At this time last year, the market had finally recovered from an August swoon that left the S&P 500 more than 10% off its all-time highs, the first 10% correction in more than four years, with the worst still ahead in January and February 2016. Concerns over market risk were dominating the conversation: China (the primary driver of the August 2015 swoon), oil, the soaring U.S. dollar, tightening financial conditions, declining earnings, and the prospective first interest rate hike since before the Great Recession.
As we look back at 2016, by and large, the market has reached the milestones we had forecast for the year, some a little more slowly than expected, but with some unexpected developments, such as the outcome of the U.S. presidential election and the vote for the U.K. to leave the European Union. We were looking for the end of the earnings recession, and got there in the third quarter of 2016, and for stability in oil prices, which we saw starting in February. Other milestones required the election outcome as a catalyst, such as a shift in rate expectations and a transition to fiscal stimulus from monetary stimulus.
Passing these milestones puts new forces in play in 2017 that create new opportunities, but also new risks. Here is an overview of what to watch and what it might mean for stock market performance and portfolio positioning as we enter the New Year.
We expect growth to accelerate modestly to near 2.5% with a low chance of a recession in 2017, driven by gains in consumer and business spending, supported by potential pro-growth fiscal policies.
The economic recovery that began in mid-2009 may pass its eighth birthday in 2017, as the odds of a recession — based on leading economic data — remain low. However, the risk of a recession due to a policy mistake (e.g., monetary, fiscal, trade, immigration) has increased heading into 2017. President-elect Donald Trump and Congress will likely enact pro-growth policies in the first half of 2017, including corporate and personal tax cuts, increased spending on infrastructure and defense, and deregulation. These policies may boost economic growth (and change the drivers of growth) in 2017 and 2018. However, they may ultimately lead to some of the “overs” that tend to emerge at the end of expansions (over-confidence, over-borrowing, over-spending), and lead to a recession sooner than otherwise would have been the case. With odds of a recession still low, we expect stocks to outperform bonds in 2017, but with the overall return environment for most asset classes modestly below historical levels.
Gains will likely come with increased volatility as the economic cycle ages. A policy mistake in Washington, D.C. (as noted earlier) that causes a recession is the primary risk to our forecast. We see elevated stock market valuations as a risk only in a scenario in which the market begins to, or actually does, price in a recession. High valuations have not historically been good predictors of short-term stock market performance.
We expect mid-single-digit returns for the S&P 500 in 2017 and the continuation of the nearly eight-year-old bull market, consistent with historical mid-to-late economic cycle performance.
Our forecast for economic growth in 2017 supports our expectation for stock market gains next year and the continuation of the bull market past its eighth birthday. Historically, in years when the U.S. economy does not enter recession, the S&P 500 produces an average gain of 12% and is positive 84% of the time.
We expect earnings growth in the mid- to high-single digits in 2017, well above the flat earnings of 2016 and consistent with long-term averages. We could see the fastest economic growth since the end of the Great Recession, supportive of corporate profits.
How to invest in this stock market landscape?
After more than two years of earnings declines in the energy sector, we expect earnings growth to return, based on expected oil price stability while Industrials may benefit from increased infrastructure spending.
Accelerating economic growth tends to favor the value style, and improved financial sector performance is expected based on a steepening yield curve and reduced regulatory burden.
Healthcare may benefit from a more benign regulatory environment while technology valuations reflect overly pessimistic expectations for policy impact and present an attractive opportunity.
Businesses both in the U.S. and abroad are adept at adapting to changing business environments. Simply being invested lets these companies do much of the work for you in adjusting to new economic realities. We suggest focusing on your personal milestones, having a plan, and understanding when global events actually matter. The milestones that the markets have passed in 2016, and the new environment we are entering in 2017, may require some course adjustments.
When uncertainty and volatility arise, as they always do, the wisest course is often to maintain the long view and seek the kind of sound financial advice that can help keep you on course.
We wish you a Happy New Year ahead and look forward to a prosperous 2017.
As always, please contact me with any questions or to book a phone appointment click the link below:
Bryan Foronjy, CFP®
Founder and Principal Wealth Manager
CA Insurance Lic. # 0F84170
Bryan Foronjy is a registered representative with, and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group LLC, a registered investment advisor. Strategic Wealth Advisors Group LLC and Foronjy Financial are separate entities from LPL Financial.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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