A new year is a good time to review one’s investments. Certainly people should monitor their investments more than once a year, but having a more thorough review at the end of a year is certainly a good idea.
For those of you who look at various financial publications you will see that there are plenty of predictions for the new year. While some of these predictions will be more insightful versus others, there is no one in the investment business who is capable of giving accurate predictions every year.
What limits the accuracy of predictions is that there are too many unknown variables that can occur over the course of a year. Some years there will be more surprises versus other years, but there will always be something unexpected that does occur.
What might be useful for investors to consider is a range of likely outcomes. For example someone might have a prediction that the stock market will go up 7% in 2017, of which 5% is price change, and the other 2% would be from dividends. While the 7% figure might be the investment strategist’s best estimate, the likelihood of stocks returning exactly that amount is unlikely.
The investor should realize that the range of possible returns for stocks in a given year is quite wide. In fact the range with 95% confidence would be from approximately a return of -20% to 35%. Therefore, someone should not take too seriously what someone’s specific forecast for the year might be.
This should also emphasize the point that someone who is investing in stocks needs to have a longer-term perspective. While someone in a given year does have a noticeable chance of losing money in the stock market, the likelihood of losses greatly diminishes over a 10 year period.
This same type of analysis can also be used with regards to bonds. An investor might have an expectation of a 3% total return with a bond fund, but there would be a significant range of possible outcomes. Of course with bonds the range would not be as wide, as it would be with stocks, and shorter term bonds would have a more narrow range of outcomes versus longer term bonds.
Now that I have given the limitations of relying on investment forecasts, I will try to mention several areas that could impact investment returns in 2017. When looking at what impacts investment returns, corporate earnings and interest rates are two of the most important variables.
A new administration always creates an element of uncertainty, and certainly for 2017 having a president with no political experience adds to the uncertainty. The stock market has done well since the election on the perspective that the Trump presidency will be good for the economy and corporate earnings.
Having a less stringent regulatory environment and lower tax rates could certainly be a positive for the economy, however trade policy could become a negative that would impact corporate earnings. In addition the U.S. dollar has strengthened recently, which would tend to make our exports more expensive.
The expectation for interest rates is that they will continue to move higher in 2017, as has been occurring since the election.. Traditionally an increase in interest rates is a negative for the stock market, but because interest rates are still very low, a moderate rise in rates from here should not be overly negative for stocks.
For those who are working, the labor market both nationally and in our local area appears to be reasonably solid. The unemployment rate is at its lowest level in many years. While wage gains have been quite small for many years, expectations for 2017 appear to be somewhat more favorable for greater salary increases.
Returns from international markets lagged the U.S. market again in 2016. If the economies in the rest of the world perform better in 2017, international markets could perform well given their relatively attractive valuation.
With the U.S. stock market performing reasonably well in 2016, a review of one’s portfolio should determine if one’s percentage in stocks is still within a targeted range. If it has grown beyond that range, it could be an appropriate time to trim back positions in U.S. stocks and redeploy the funds in other areas.