As we begin 2017 many research reports have crossed my desk predicting and prognosticating just how this year could play out. All we know at this time is the number of variables is seemingly very wide.
While I am not a forecaster, I am tasked with making investment decisions for clients that correspond to the events of the real world. This month I thought it would be helpful to take a look at major areas of common discussion and zero in on possibilities. I think it would be constructive to narrow our fields to the economy, interest rates, corporate earnings, and the stock market.
Under each topic please indulge me as I share my thoughts on two fronts: WHAT I HOPE and WHAT I FEAR.
The Economy – The US economy is currently in the second longest period of expansion since World War II. Although this recovery has been more shallow than most it has lasted several years.
WHAT I HOPE: I hope that legislators do just enough to bring about 2 to 3 percent GDP growth. It would be ideal if we could goose the economy just enough to make our growth meaningful without overheating.
WHAT I FEAR: I fear that we might just over stimulate with measures that are both short lived and deficit producing, leading to a recession.
Interest Rates – For far too many years interests rates in the US have been governed by the monetary policy of the Federal Reserve Bank. They made it a policy to buy trillions of dollars worth of bonds and price money to banks in such a way as to ensure that there was no 2nd Great Depression.
WHAT I HOPE: I hope that interest rates will rise predictably and slowly enough to allow investors in the bond market to ratchet up to higher yields.
WHAT I FEAR: I fear that interest rates will rise too often and too much putting stress on the prices of bonds.
Corporate Earnings – Corporate America has done a great job responding to the “Great Recession” of 2008-2009. After many years of rebounding the last two years have been very sluggish. Very. Most forecasts for 2017 call for a resumption of growth in earnings.
WHAT I HOPE: I hope that 2017 produces growth in earnings again and that it does so in line with the optimistic expectations.
WHAT I FEAR: I fear that earnings accelerate too fast leading to a sharp reversal next year.
The Stock Market – For most investors all that occurs in the previous three topics are important because of their impact on the stock market. Since bottoming out in 2009 US stocks have rebounded nicely and currently stand at or near record highs.
WHAT I HOPE: I hope that stocks increase in value commensurate with the growth in the GDP, current relatively low interest rates and accelerating corporate earnings.
WHAT I FEAR: I fear a stock market that gets ahead of itself. While great fun at the time there is a price to pay later.
As one can see, there are many moving parts to the economy and the investment world. Let’s revisit these thoughts next January and see just how these themes played out. Then, with hope and diligence, plan for yet another year.