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 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 US dollar, tightening financial conditions, declining earnings, and the prospective first interest rate hike since before the Great Recession. The path to routine outcomes seemed anything but routine.
There will be new forces in 2017 that will create new opportunities, but also new risks. The economic recovery that began in 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 (overconfidence, overborrowing, overspending), and lead to a recession sooner than otherwise would have been the case.
Both developed and emerging markets have seen their corporate earnings pictures improve in 2016, with emerging market earnings expected to grow by 15% in 2017, according to FactSet consensus estimates. Developed market earnings have also shown improvement after several years of decline. Valuations overseas, again especially in emerging markets, are particularly attractive. Although there may be opportunities, geopolitical risks suggest some caution.
The election of Trump heralds a new era in Washington, one dominated by increased skepticism over the benefits of global trade. As part of his campaign platform, Trump has suggested imposing tariffs on imported goods and renegotiating the North American Free Trade Agreement (NAFTA) and other trade treaties. These actions would negatively impact foreign economies and markets, making them less attractive to global investors. Trump ’ s election captures the broader spirit of the anti-globalization movement occurring worldwide. That movement was evident in the U.K. ’ s “ Brexit ” vote to leave the European Union and will be a factor in many upcoming elections in Europe over the next six months. These developments have increased our caution on international markets for the near term.
One of the greatest risks to any international investment is currency uncertainty. Immediately after the U.S. election, the dollar rallied against almost all major currencies as U.S. interest rates increased dramatically. Continued dollar strength, like that experienced in late 2014, would be meaningfully negative for all non-U.S. assets, both equity and debt, developed and emerging. Although not the most likely scenario, it remains an important risk.
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 objectives, having a plan, and understanding when global events really matter. As forces change from 2016 to 2017, some course adjustments may be required. When uncertainty and volatility arise, as they always do, the wisest course is often to maintain the long view and seek the kind of financial advice that can keep you on course.
The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Investing is stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
- Data provided by LPL Financial.
- Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly cross many sectors and companies.
- All indices are unmanaged and may not be invested into directly.
- All investing involves risk including loss of principal.
- International investing involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened in emerging markets.
- The fast price swings in commodities and currencies will result insignificant volatility in an investor’s holdings.
- Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments.