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 we’ve emphasized in past summaries, 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.
We’ve talked about the hazards of timing the market in the past. So here is another way to look at it. 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.
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. 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.
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
Source: Wall Street Journal, MSCI.com, MTD returns: Nov. 30, 2016–Dec. 30, 2016
YTD returns: Dec. 31, 2015–Dec. 30, 2016,*Annualized, **in U.S. dollars
The year 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.
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.
However, the economic skies never fully clear, and we are 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 his 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 underway, 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 are we 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.
A new recession and bear market are inevitable, as is an eventual economic recovery and new bull market. While changes to your personal situation may cause us to revisit your investment plan, a disciplined approach has historically borne the greatest dividends.
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