Quarterly Investment Commentary, January 2017Submitted by Harvest Asset Group, LLC. on March 24th, 2017
As we enter 2017, significant policy changes are anticipated in the U.S. that could impact both U.S. and global economies. There are a lot of unknowns and different opinions about what to expect next.
Looking back at 2016, the year got off to a rocky start, tumbling 10% in the first two weeks—the worst start to a year since 1930. The markets eventually bottomed in mid-February and began a long, slow recovery, turning positive by the end of March, suffering a setback when the U.K. decided to leave the Eurozone and endured another hard bump right after the elections. The Dow finished at 19,762.60 for the year—the bull market has continued for another year.
Every year of this longstanding bull market, we have to look over our shoulders and wonder when and how it will end. With the January downturn and so much uncertainty at this time last year, nobody could have predicted double-digit returns on U.S. stocks at year-end. Next year could bring more of the same, or it could fulfill the dire predictions many have made during the election cycle, including both Democrats and Republicans who believe the country is in worse shape than the numbers would indicate.
Today’s Economic Perspective
U.S. GDP has averaged just 2.1% growth annually since the Great Recession, making this the most sluggish of all post-World War II expansions.
Slow but steady has not been a terrible formula for workers or stock investors. The unemployment rate has slowly ticked down from a post-recession peak of 10% to less than 5% currently. U.S. stock indices are posting record highs with double-digit gains, and the Dow 20,000 level, while essentially meaningless, is still catching a lot of attention.
- Upward revisions to global GDP forecasts;
- Strong growth in personal income and retail sales;
- Strong household balance sheets, savings rate and record low household financial obligations ratio;
- Strong hiring, record high job openings, high quit rate, declining unemployment rate, record low weekly unemployment claims, strong car sales, rising housing starts; and
- Minimal inflation threat.
Anticipating a Year of Unknowns
It’s clear that the new President wants to accelerate America’s economic growth, but the policy prescription has not always been clear. Will we rip up longstanding trade agreements, cut back on immigration quotas and deport millions of workers who crossed the border without a visa? Will there be a wall built between the U.S. and Mexico? Will the government pay for huge infrastructure projects, at the same time reducing taxes and thus raising the national debt? Will Congress raise the debt ceiling without protest if that happens? Will the Fed raise rates more aggressively in the coming year, or cooperate with the President in his efforts to drive the economy into a faster lane?
At the same time, there are many unknowns around the globe. China’s economic growth has stalled for the second consecutive year, and you will soon be reading about a banking crisis in Italy that could force the country to leave the Eurozone—potentially a much bigger blow to European economic unity than Brexit or a still-possible Greek exit. Russian hackers may have ushered in an era of unfettered global intrusions into our Internet infrastructure, and there will surely be a continuation of ISIS-sponsored terrorism in Europe and elsewhere.
Today’s Market Perspective
Despite record highs in markets, there is still a lot of skepticism about market valuation, and a clear absence of irrational exuberance. Stock prices have been driven by an earnings turnaround, and have been described by analysts as fully – but not over-valued.
Where values go from here will be driven largely by the profits which companies produce. Given expected regulatory easing, an accommodative Fed, and favorable economic conditions, companies could continue to add value for some time.
In the bond markets, it is possible that the decades-long bull market—which was in large part due to continuous declining interest rates—has ended. While the fixed income world is experiencing rate rises, including a nudge by the Federal Reserve Board, the moves have not exactly been dramatic.
Fixed income securities (bonds) are experiencing very low yields and may not rise as quickly as many expect. There are still a number of factors keeping bond yields low, including:
- Pressure on yields from declining Federal deficit;
- Pressure on yields from monetary policy in Europe; and
Current monetary easing initiatives in place that last through 2017.
A lot of changes can be expected in the months ahead. What those changes will be and what the impact on economies and markets will be is largely unknown.
What we have learned over the past few years is that the markets have a way of surprising us, and that trying to time the market, and get out in anticipation of a downturn, is a loser’s game. The history of the markets has been a general upward trend that benefits long-term investors, and looking out over the long-term, that—and a few hard bumps along the way–is probably the best outcome to expect.
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