What is our outlook for 2017? What could go wrong? And, more importantly, what could go right? The latter, quite frankly, is a better-odds expectation since positive annual returns for the stock market outweigh negative annual returns three to one.
But first, let’s cover what could go wrong? There is always something that could go awry, of course, and there are always compelling stats, studies, and trends that can appear ominous. But, generally the best course of action is to always mentally prepare for a correction in the near-term, while maintaining an appropriately diversified portfolio that can weather various market conditions for long-term investment goals.
In my opinion, the leading reason to be cautious entering the new year is that there has been tremendous enthusiasm since the U.S. presidential election among many investors (many of whom were underinvested in recent years). This optimism does have some fundamental support, but I believe that the recent enthusiasm and market action have primarily been driven by speculation.
We have seen this situation before. One example is with President Ronald Reagan’s election. The stock market surged initially, only to stall and correct the following year, and finish with a loss. Which of course, set the eventual stage for an incredible bull market.
So, what could go right? As always, it’s the unexpected that could spur market gains: technological or healthcare breakthroughs, economic acceleration, productivity gains, and much more. Many investors think black swans (unexpected events) are always negative, but again, the reality is that surprises are more likely to be positive events than negative ones. Negative black swans, however, tend to be more memorable as they are more sensational. The market reacts swiftly to negative surprises, while positive black swans are typically absorbed into market returns at a much more gradual pace.
Which markets could post gains this year that would surprise many investors? One possibility is the bond market. The bond market has had an even higher batting average than the stock market for generating positive historical annual returns, and that has even been the case during rising-rate environments in past decades. The bond market will start 2017 with a higher yield, and thus expected return, than it did last year.