An overview of expectations and factors that could affect the market in the coming year were outlined by strategist Burt White of LPL Financial in a recent Barron’s article.
GDP: “We expect growth to accelerate modestly to near 2.5% with a low chance of a recession in 2017, driven by gains in consumer and business spending, supported by potential pro-growth fiscal policies.” While White says the odds of a recession based on economic data remain low, a “policy mistake” by the incoming administration could increase risk. LPL, he writes, expects stocks to outperform bonds in 2017, but with the “overall return environment for most assets classes modestly below historical levels.”
U.S. dollar: “Fundamentals overseas have been improving, particularly in emerging markets, as have valuations, where emerging markets are especially attractive. However, we remain cautious on international investments due to global geopolitical risks.” That said, White asserts that despite improving fundamentals, his firm would want to see increased stability in the dollar before adding to positions.
Equity returns: “We expect mid-single-digit returns for the S&P 500 in 2017 and the continuation of the nearly eight-year-old bull market, consistent with historical mid-to-late economic cycle performance.” Specifically, the strategist suggests that small-caps may outperform early in 2017 (due to potentially supportive policies) and an aging business cycle could favor large-caps later in the year.
Fixed income returns: LPL expects the 10-year Treasury yield to finish 2017 in “its current range of 2.25-2.75%, with a potential for 3%.” White asserts, “The recent rate hike shows the Federal Reserve may start gradually normalizing interest rates in earnest.” He continues to favor intermediate-term bonds going forward, but says that “a small allocation to high yield and/or bank loans may make sense for suitable investors.”
In conclusion, White writes: “We suggest focusing on your personal milestones, having a plan, and understanding when global events actually matter.”