2017 Investment Outlook
Brian: Kyle, we’re in the early stages of 2017. The first couple weeks have treated us pretty well. Let’s talk a little bit about how we got here from 2016 as we set the stage for our expectations for the new year.
Kyle: You know, you look specifically, Brian, at something like employment, which improved for much of the year last year. You look at consumer thoughts about the future, and optimism really picked up at the end of last year. I think those are the kinds of things, as we look ahead to 2017, that are really going to start to build on themselves. Those really allow earnings to progress the way we hope that they’re going to progress, really allow stocks to continue to grow the way we expect them to continue to grow.
Brian: I think it’s what you’re pointing out, that people were then allowed to focus on the things that really mattered: interest rates, earnings.
How did we react to interest rates going up at the end of year? And how resilient were we to many of the things that didn’t happen that we were fearful of?
And now as we go into the new year, we start looking ahead, and you think, “Well, earnings, for instance.” I think we’re seeing projected 11.5%, 12.5% forecasted earnings for the year? I like that. That’s a pretty good answer.
If it’s all about earnings and interest rates, what about interest rates? I think the bond market would show you we’re pretty confident that interest rates aren’t going anywhere too fast too quickly. It sets a pretty good tone for this year.
Kyle: Yeah, Brian, as long as interest rates are rising for the right reason, that the economy continues to progress, that we see continued signs that inflation is going to reach that target that we hope, the 2% that the Fed’s been talking about. And I think there’s every reason to think that that 11.5%-12.5% earnings forecast is reasonable.
I think there’s every reason to expect that, given that stocks are not historically cheap, but certainly not expensive, that there’s room to run for stocks. So I think you’re setting up for what could be another fairly nice year, all things considered.
Of course, there are risks out there, as there are with any year, but I think for the most part we’ve got things headed in the right direction here.
Brian: Yes. Without getting political, what themes might we glean out of the new administration, and how they might affect things for the year?
Deregulation is a potential theme. I think that it’s possible that we reach some corporate tax reform. I think the business community would enjoy that. Individual tax reform, perhaps. Perhaps the repatriation of some of this capital from overseas that comes back, if we could figure out a way to do that properly.
A couple different themes that politically could help push things along in the current year.
Kyle: And, Brian, I think all this really sets up for a U.S. economy that’s pretty well-positioned relative to the rest of the world. So you look at the dollar, which has strengthened pretty meaningfully the last few years, it’s likely that we keep some of that strength as we look to the year ahead.
That also sets up really well for small- and medium-sized companies who do business here in the U.S. They don’t have to compete outside the U.S. as much as the bigger firms do. I think that’s an area of opportunity as well, as we look at the potential for rising interest rates. Which will also keep the dollar strong.
Brian: If you want to get an idea how your bond portfolio might hold up in a rising interest rate environment, kind of take a look at how things went for six or seven weeks there at the end of the year. People still made some money in the safer side of things. I think more surprisingly, the lower quality, the lower credit issues, really held up well and ended up contributing to earnings last year.
Do I then need to be worried about that lower quality stuff falling apart next year?
Kyle: I think as we look ahead, that’s an area where you go, “Okay, maybe we back off a little bit.”
Let’s remember why we have bonds. Let’s remember why we focus on balance. It’s not simply to make money. It’s to make sure that we’re accounting for risk. So certainly, I think that’s a consideration as we look ahead.
Brian: I’m pretty optimistic about a lot of the data points that we’re seeing. However, always a good reminder that sometimes the things that scare us are the things that we don’t know about. So I’m cautiously optimistic as we go into the year.
Prepare your portfolio for all scenarios, and I think knowing that you have the safety of bonds in your portfolio, a balanced portfolio, the optimism that stocks may contribute to our earnings this year, I think that’s the way to go into the new year – as always.
(initially posted Feb. 2, 2017)