by Linda S. Parenti, CFA
President & Chief Investment Strategist
Equity markets began the year quite the opposite of how they ended. We started out with the worst beginning two-week performance in the history of the S&P 500 and ended with a strong rally the final two months of the year. For the entire year, the index gained 12% in total return (price appreciation plus dividends). In 2016, analysts fretted over sharp declines in oil prices early in the year, then markets faced the startling Brexit vote, and finally the unexpected Trump victory. Add to this the yearlong agonizing over the timing of the next Fed rate hike. It was a year of surprises which were accompanied by swift market moves and reversals. For those attempting to time the market, missing just the three best performing days would have reduced the S&P 500’s gain to only 4.4%. For those who stayed invested throughout the year, you certainly deserved to be rewarded given all the uncertainties and dire predictions.
As we look ahead to 2017, the economic climate appears healthy. Manufacturing has recovered, the larger services side remains strong, employment has risen for 75 straight months, wage growth has returned, and consumer confidence is high. Overseas economic data has also been encouraging. Although the Fed is predicted to raise interest rates several times this year, the increases are coming off extremely low levels and for constructive reasons. All these factors build an encouraging framework for stocks. Of course, there are also concerns. The current bull market is nearly eight years old and while length of time does not limit bull runs, valuations are no longer cheap. There is also the risk that the increased economic growth expected from the proposed changes of the incoming administration may not fully materialize.
So, if valuations are high why am I still optimistic towards equities? Here are some reasons:
- Following four quarters of decline, earnings growth is again positive. Stronger earnings provide for more reasonable valuations.
- Even prior to the election, the economy was showing itself to be on solid footing with little risk of recession ahead.
- Company boards increased their dividend payouts by 4% in 2016. This is a good indicator of confidence in their future prospects and financials.
- Historically, periods of full Republican control in Washington have delivered some of the better two-year annualized returns versus other combinations.
- Even though bullish sentiment has increased post-election (a contrarian indicator), it is coming off of a long, multi-year period of skepticism towards stocks. There remains room for improvement as high levels of cash are still sidelined.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not take into account the objectives, financial situation, or particular needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period of time. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.