First a quick review of some of the important themes from 2016. The year started under circumstances that now seem in stark contrast to the way we closed it out.
On the first day of trading the S&P 500 index finished lower by 1.5% as investors carried with them into the new year mounting fears of slower global growth and a possible recession. Combined with fears of the Federal Reserve’s more aggressive raising of interest rates in 2016, equities fell through the middle of February-with the S&P 500 declining by 10.5% through Feb. 11, before seeing a steady and rapid rebound through the beginning of June.
Though global growth concerns have faded amid better economic data, Fed officials slowed their interest rate normalization plan, and the subject of volatility remained a top of mind issue for investors through the middle of 2016. As a result utilities, telecom, and low volatility stocks led markets higher, seeing double-digit returns through the front half of the year.
Rapid declines in oil prices were another important reason investors hit the panic button earlier in the year. However, as oil prices recovered from their February lows, so did markets, particularly energy stocks.
The UK voted in June to sever its participation in the European Union (known as Brexit) and at the same time investors were once again feeling comfortable about the world’s prospects. The decision had a quick and chilling effect on global equities (especially throughout Europe) and acted to temporarily stall market momentum. However, in the back half of the year investors rationalized the effects of Brexit, seeing limited “immediate” impact and continued to take global stock prices higher.
Oh, and then there was an election in November. It is hard to remember a time in our recent history where the two candidates were as different and raised the emotional level as high as our Democratic and Republican candidates did. It is not unusual for the country to elect a president from the “other” party after one has been in power for four or eight years, but this was a very different election that I don’t think we will forget any time soon. There is a lot of unknown that will unfold over the next several months and years.
Some financial themes for 2017:
☆ Financial crisis is the rear-view mirror, reflation begins. Consumer confidence is on the rise, corporate fundamentals remain solid and emergence monetary policy has ended in the U.S.
☆ Rise of the private sector. The prospect of fiscal stimulus (reduced regulation, tax reform, infrastructure investment) on top of an already improved pace of economic growth could stimulate consumers and businesses alike.
☆ Populist movements offer new uncertainties. A rising tide of anti-establishment sentiment across the industrialized world could create higher levels of uncertainty. Europe will be in the cross hairs in 2017.
☆ Globalization under the microscope. Will the Trump administration alter well-established trade and immigration policies? New policies could temper the effects of a reflationary environment in the U.S.
☆ U.S. dollar strength could challenge performance. Relative economic strength in the U.S. (versus global peers) could strengthen the dollar. This could act as a headwind for U.S. export activity as well as multinationals.
☆ Equities outperform bonds, but with limited upside, although global equities should outperform bonds. Equity valuations are not cheap and earnings trends will need to continue to improve for stock prices to move higher.
☆ Higher interest rates create mixed outcomes. Higher interest rates could hurt total return investors and create mixed results across financial income assets. For non-equity income investors, higher interest rates may be a welcome event.
In 2017 we expect interest rates to rise, inflationary pressures to build in the U.S., populist movements across Europe to elevate uncertainty and globalization to come under the microscope. Looking forward, the market landscape is likely to evolve next year with new opportunities and risks developing. Although we expect periods of volatility there is opportunity to be more optimistic than in past years. We believe the opportunity for more business-friendly initiatives out of Washington next year is a promising development. Tempering that view, though, is the lack of specifics on how a Trump administration plans to accomplish its campaign promises and if it can truly deliver the growth market valuations now reflect. With interest rates set to rise next year, investors may have priced in very little room for disappointment.
What is working well in our mountain community? We have many long-serving businesses and individuals that contribute to the community. We have younger people who have started successful businesses in the last few years. We have affordable real estate and space to grow and develop. We have Yosemite and Bass Lake and so much beauty in our back yard.
What could make our community even better? If I had to pick two things it would be to develop a sense of who we are as a community and what we have to offer to the world, and to develop a lot more employment opportunities.
Many things could help the above points. We need: more medical options, a large clothing store, mixed use development that takes advantage of our river or creek, bike lanes and sidewalks, to fill empty retail and office buildings, a reason for tourists to stop and stay longer (maybe move here), and finally a welcoming entrance that lets visitors know where they are and what we have to offer, maybe at the corner of highways 49 and 41.
NOTE: David Nemeth is a longtime financial planner and current co-owner of Ameriprise Financial in Oakhurst.