2017 Outlook - Key Points
In 2016, all of the major stock categories posted gains in the fourth quarter with a significant percentage of gains realized following the U.S. presidential election. Small caps performed very well in the fourth quarter and energy stocks led equities as oil prices recovered.
After the election, the financial sector rose due to hopes of deregulation and higher interest rates. The promise of fiscal stimulus was the reason for a sharp rise in industrials. Not surprising, the health care sector trailed due to an uncertain future.
The future of inflation is still at bay--but many agree that it will rise slowly which means there is room for an increase in inflation. This also means that it should not cause significant harm to stock valuations.
Emerging market stocks rallied up to the U.S. presidential election, then backed off some but still ended the year in a double-digit plus territory. This is a category we are very favorable of, especially on a long-term basis. In the international developed space, earnings expectations have begun to stabilize. We continue to monitor this asset class.
As far as bonds are concerned, rising oil prices last year brought about the significant outperformance of high yield bonds and floating rate loans. For 2017, we could be examining treasury inflation protected securities (TIPS) as we anticipate an increase in inflation. Municipal bonds look to be a type of bond that will do well this year as the fundamentals are very strong. For those in higher tax brackets and with a possible income tax reduction ahead, municipals could still be a great choice in the bond space.
Most economists agree that the U.S. is in the late-phase of its business cycle. In this late-phase, historically stocks have outperformed bonds.
As always, we recommend maintaining a well-diversified portfolio. Long-term investing success includes a well-diversified portfolio that includes one’s risk tolerance, time horizon and an individual financial situation in mind.