January 2017 Market Commentary
The year in review and what might be ahead
2016 has come and gone. It started out in a very rocky fashion, with comparisons to 2008 that were too numerous to count.
Let’s be clear. As I’ve emphasized in past commentaries, markets don’t always trade in a quiet and orderly fashion. But, just because we run into turbulence doesn’t mean it’s time to retreat into cash. Volatility has been and always will be part of the investment landscape. It’s how we manage and mitigate risk that is critical.
I’ve talked about the hazards of timing the market in the past. So here is another way to look at it. In order to successfully time the market, you have to be right twice–getting out near the top and getting back in somewhere near the bottom.
There isn’t anyone who can accomplish such a feat and do it consistently.
Case in point. While researching this month’s commentary, I ran across an article published by CNN Money that offered up an opinion by what it called an “investment guru.” He is well-respected in the industry, and his opinions hold weight with many investors.
Published January 28, 2016 amid heavy turmoil, he called cash “the most underappreciated asset,” and advised investors to hold 25-30% of their wealth in cash.
This, he said, will give you “many opportunities to buy really good names at beaten down prices.” Well, just two weeks later, the S&P 500 Index bottomed out (St. Louis Federal Reserve).
Besides the pitfalls of trying to time stocks, that kind of advice must depend on many different factors that are specific to an individual or couple’s unique circumstances.
While his ideas were well-intended, it goes against the grain of what we preach and how we approach financial planning.
We have just entered 2017 and markets are calm and near highs. That follows a year when the S&P 500 Index rose by 12%, including reinvested dividends, according to Morningstar. In fact, it’s the sixth year in eight that the closely watched index of large-company stocks rose by more than 10%.
Going forward, there is one thing I can promise you—we will run into another round of volatility.
But we are always here for you. If you see something in print or on the Internet that causes you concern, please don’t hesitate to reach out to us. We are always happy to answer any questions or address any concerns you have.
Table 1: Key Index Returns
| MTD % | YTD % | 3-year* % | |
| Dow Jones Industrial Average | +3.3 | +13.4 | +6.2 |
| NASDAQ Composite | +1.1 | +7.5 | +9.0 |
| S&P 500 Index | +1.8 | +9.5 | +6.7 |
| Russell 2000 Index | +2.6 | +19.5 | +5.4 |
| MSCI World ex-USA** | +3.2 | -0.1 | -4.2 |
| MSCI Emerging Markets** | -0.1 | +8.6 | -4.9 |
Source: Wall Street Journal, MSCI.com
MTD returns: Nov. 30, 2016—Dec. 30, 2016
YTD returns: Dec. 31, 2015—Dec. 30, 2016
*Annualized
**in US dollars
Looking ahead
2017 is starting in an upbeat fashion. The economy is moving ahead at a modest pace, interest rates remain low, and odds of a recession are low (LPL Research).
Moreover, Thomson Reuters forecasts S&P 500 profit growth of 12.5% this year, and consumer and small business confidence is up sharply in wake of the election (Conference Board, National Federation of Independent Business).
However, the economic skies never fully clear, and I am always monitoring the landscape.
For starters, the forecast for corporate profits is predicated, among other things, on continued economic growth.
The late-year optimism that pushed the major indexes to new highs was aided by optimism that tax reform, regulatory relief, and infrastructure spending are on their way.
But what shape will tax reform and new spending take? Compromises will be needed and major new spending, if it passes the Republican Congress, could have huge lead times.
One thing that has been certain–Donald Trump has toned down his anti-free-trade rhetoric, alleviating some worries among investors.
Of course, all of Trump’s tough talk on trade may just be bluster, as he hopes to strike tough new trade deals.
But what if a miscalculation sparks a trade war? We learned from the 1930s that a breakdown in global trade has serious consequences. The infamous Smoot-Hawley Tariff Act passed as the Great Depression was getting under way, erecting new barriers to imports. Unfortunately, it was met by retaliation, and the trade war that enveloped the world worsened the Depression.
In no way am I forecasting a downturn of that magnitude, but instability among the nation’s key trading partners would likely create unwanted volatility.
That said, problems abroad that have not had a material impact on the U.S. economy have created temporary angst, slowing but not ending the current bull market. The evidence reveals that over the past 50 years, bear markets have been primarily associated with recessions (St. Louis Federal Reserve, NBER data). As the old adage goes Bull Markets do not die of old age.
A new recession and bear market are inevitable, as is an eventual economic recovery and new bull market. But predicting when any of these events will actually occur is a fools game. What is important to remember is that as changes occur in your personal situation you revisit your investment plan, and a disciplined approach has historically borne the greatest dividends.
I hope you’ve found this review to be educational.
If you would like to discuss your personal investment needs schedule a complimentary 20 minute consultation by calling 336-310-4233 or emailing me at peter.huminski@lpl.com.
The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
No strategy, such as diversification, can assure success or protect against loss in periods of declining values. Investing involves risk, including loss of principal
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. All indexes are unmanaged and an individual cannot invest directly in an index Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries excluding the United States. With 1,024 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.