Looking Forward to 2017

We could have a very interesting year in the markets in 2017.

We are in one of those rare periods when investors, analysts and economists are in general agreement about the outlook. For the most part, they are optimistic about economic growth, and that in turn makes them optimistic about earnings and stock prices.

They also expect inflation and interest rates to rise. There are two reasons this general agreement could make 2017 interesting.

One reason is that the expected economic outcome already could be reflected in asset prices. There were significant changes in the markets right after the U.S. elections. Stock prices rose, especially stocks of smaller companies. Interest rates climbed and bond prices declined. The dollar rose sharply against most other currencies. Markets might already have anticipated what will happen in the economy in 2017.

The second reason is that markets become very volatile when there has been general agreement about the future and events then differ from the expectations. It is possible that the new administration will implement its policies faster than generally expected and the economic results will be better than forecast today. Higher stock prices and lower bond prices likely would follow in short order.

But what if the results aren’t as positive as expected? Suppose it takes longer to implement policies than expected, or Congress and others (the bureaucracy and courts, for example) either prevent implementation of the proposed policies or force them to be modified. Once investors realize what is happening, they could reverse much of the market action that’s occurred since the election.

I don’t know how things will develop. That’s why I don’t invest based on one forecast or expected result. I prefer diversification and balance. We overweight our portfolios only when there appears to be a margin of safety and trends are moving in that direction. We miss out on some big gains that are possible from guessing correctly, but we also avoid major losses that come from guessing wrong.

Some of the toughest times to invest are when most people seem in agreement. It was tough to be aggressive in early 2009 when most people were pessimistic but, in retrospect, markets were forming bottoms. It also is tough to maintain some balance in a portfolio when most people seem optimistic about stocks, real estate, or some other asset.

One trend I believe is likely to continue in 2017 is a divergence in how the different assets are valued, especially stocks. The rally since the election of Donald Trump as the next president of the United States hasn’t helped all stocks and sectors. There have been both winners and losers. That’s also the case with other asset classes. With the Fed becoming less of a factor in the markets, some assets are rising while others are falling. Expect more of that in 2017. It is likely to be a good year for investors who make the right stock selections or asset allocation decisions.

The Data

The housing data for the end of the year was mixed. New home sales increased another 5.2% in November. But it’s a volatile number. The three-month average hasn’t changed since summer. Over 12 months, sales are up 16.5%, but prices are down 3.7%.

Home prices continue their steady increase, according to the S&P CoreLogic Case-Shiller Home Price Index. Prices rose 0.6% in October and 5.1% over 12 months.

Higher mortgage rates might be having an effect on the housing market. Pending home sales declined 2.5%, when analysts were expecting a 0.5% increase.

Consumer Sentiment, as measured by the University of Michigan, rose another 0.2 for December to close the year at a new high for the economic recovery. The report said 18% of respondents spontaneously mentioned that they are more optimistic because of expectations of higher growth under the new administration. The previous record was 9% following Reagan’s election in 1981.

Consumer Confidence, as measured by The Conference Board, shot up. At 113.7, the index is 12.9 points higher since the election and is at its highest level since August 2001. But the report isn’t uniformly positive. Consumers are mostly confident about the future but the report shows little change or even declines in the portions about current conditions.

Manufacturing continues to improve. The Richmond Fed Manufacturing Index increased again, from 4 to 8. Most of the components of the index were positive, and manufacturers reported being optimistic about most aspects of the next six months. The Dallas Fed Manufacturing Survey also showed a healthy increase to rise from 8.8 to 13.8. Again, most components of the survey were positive.

New unemployment claims declined another 10,000. They’re a little above the record lows reached in the fall of 2016, thanks to a large increase last week, but still are well below historic averages.

The Markets

Stocks are tumbling at the end of the year. The S&P 500 is down 0.61% for the week ended with the Dec. 28 close. The Dow Jones Industrial Average declined 0.54% for that week, while the Russell 2000 lost 0.91%. The All-Country World Index fell 0.45%. Emerging market equities gained 0.58% for the week, thanks to a sharp rise on Wednesday in Latin American stocks.

Long-term treasury bonds gained another 0.43%. Investment-grade bonds returned 0.35%. Treasury Inflation-Protected Securities (TIPS) rose 0.64%. High-yield bonds gained 0.17%.

The dollar gained 0.26%.

Energy-based commodities rose another 2.02%. Broad-based commodities gained 1.51%. Gold finally rose, gaining 0.83%. (It’s down 13.87% over three months.)

Bob’s News & Updates

If you’re retired or plan to retire someday, you should read my latest book, the revised edition of “The New Rules of Retirement.” Think of it as “the best of Retirement Watch.”

Don’t forget to book your free registration for the MoneyShow Orlando, Feb. 8-11, at the Omni Orlando Resort at ChampionsGate. Use my priority code, 042315, and mention it when you call 1-800-970-4355 to register.