2017 Stock Market Outlook Investor Letter

2017 Stock Market Outlook Investor Letter:

Out with the old and in with the new! 2016 is on the books, and it was a year filled with many twists and turns. As my good friend, Max Larsen, noted in his recent market commentary:

2016 has come to an end, and depending on one’s decidedly unique experiences, that consideration is either good, bad, or indifferent. The stock market for its part pretty much covered all of that ground in 2016. It was good at times, bad at times, and seemingly indifferent at times.

In the end, though, 2016 will go down as a good year for the stock market — better than it had a fundamental right to be — largely because of a year-end rally that hardly anybody saw coming.

It was a remarkable end really to a remarkable year, which started with a whimper and most definitely ended with a bang. Frankly, it was a year of extremes.

So let’s take a look at the year that was, and the future that could be…

Stocks in 2016

Stocks started 2016 just like they ended 2015, in the doldrums. The stock market continued its sharp decline which caused multiple warning flags to occur. It looked as if the stock market could roll over much like it did in 2000 and again in 2008.

The Dow Jones Industrial Index (DJIA) had two events that resulted in drops over 800 points. There were two more drops over 500 points in January and February. Both of these months experienced 500+ point swings during single trading days.

Fortunately, the market did not roll over as it did during the prior two recessions. Instead, following the 800 point decline the day of Donald Trump’s election, the market began one of the biggest six-week rallies to end the year.

To say it was an easy or stress-free year in the stock market would be a significant understatement.

Here’s the 2016 S&P 500 price chart courtesy of StockCharts.com:

You can see how it started with a dramatic decline, but stocks did not rollover. Stocks turned the other way and recovered nicely ending the year near its all-time highs.

Stocks in 2017

Richard Skaggs, a Senior Equity Analyst at Loomis Sayles, had this to say when asked for his opinion on US stocks in 2017:

“The prospects for corporate tax reform and infrastructure spending have brightened equity market expectations following the US election. For the first time in quite a while, Washington could be a source of positive earnings catalysts in the months ahead. Both large-cap and smaller cap stocks may be poised to benefit from policy changes and this broadening of equity market leadership should be a good thing all around.”

If the Trump administration is successful in implementing their economic reforms in a meaningful way it could have a material impact on the growth of US companies. We will watch these events closely as economic policy has a direct impact on winning and losing sectors of the stock market.

Bonds in 2016

Bonds went from investor’s friend to foe and did it rather quickly I may add. For years pundits have been calling for rising interest rates, and for the first time in eight years, it seems we may actually start to get higher rates.

Here is an important fact of bonds that investors must understand:

When interest rates go up (bond yields), bond prices (the value of a bond) must go down. The opposite is true, if bond yields fall, bond prices will go up.

This investing truism is best illustrated in the following chart showing the impact to price (blue line) and yield (green line) of the 30 year US Treasury Bond Index.

Take a look…

For bonds, 2016 was defined by two extremes. Bonds were loved for the first half of the year, and hated the second half of the year. When you understand that bond prices and bond yields have a direct inverse relationship, you get why rising interest rates (yield) have caused bond prices to move lower.

Here’s what Scott Service, one of Loomis Sayles’ Portfolio Managers had to say:

“While the election of Donald Trump has resulted in some wild repricing across markets, we continue to remain favorable on corporate bonds for three reasons:

1. The bulk of the near-term rate rise appears complete, while the expected boost to growth and inflation from Trump’s tax and infrastructure plans will probably not occur until 2018

2. Trump’s plan to allow companies to repatriate offshore funds at reduced tax rates, as well as the likelihood that companies will operate cautiously in this uncertain environment, may result in lower corporate bond supply

3. Higher rates will continue to encourage investment from global investors seeking higher yields”

As for me, I continue to be concerned about owning long-term bonds. I do believe much of the recent change could lead to opportunities in floating rate, some corporate bonds, and other fixed-income areas, but investors will need to be selective. We have seen rising bond prices and lower yields for many years, and if this trend is coming to an end, it will not be corrected overnight.

International Stocks and Bonds

My comments here will be brief. The expectation is there will be pockets of opportunity in the international markets, but investors will need to be selective. These markets will be highly sensitive to political factors, currency changes and world trade flows around the globe. As for me, I feel the safest opportunities will come from the US and not abroad. If this outlook changes during the year, we will look to add exposure, but not until there is clear evidence the trend is turning positive internationally.

2017 Stock Market Outlook:

For as long as I can remember, this time each year, experts, pundits and talking heads are all offering their projections for what may be ahead for the markets in the new year.

I would like to tell you there is a crystal ball that will accurately predict what will occur in the future, but as of this moment, I have not found one.

With this said, let’s take a look at what some of the big Wall Street firms are predicting for the year ahead:

2017 US Stock Market Outlook $IVV, $SPY, $SPX

Chart Courtesy of BespokePremium.com

As you can see from the chart, RBC is the most bullish with a prediction of a 10% return for the S&P 500 Index. The most bearish firm is UBS predicting a modest gain of 1.32% for the year. I think we would all be okay with any of these outcomes seeing as how they all are predicting positive returns for the year ahead.

However, experience has taught me that when everyone expects a particular outcome from the market, something completely different typically happens. If 2017 is anything like 2016, the year will be full of surprises.