2017 In­vest­ment Fore­casts: Maybe good, no longer great

Kuwait Times - - BUSINESS -

NEW YORK: Get ready for in­vest­ments to be merely good again. They’ve al­ready been great for years, as both stocks and bonds have de­liv­ered fat re­turns since the worst of the fi­nan­cial cri­sis passed in 2009. But af­ter such a strong and long gal­lop up­ward, mar­kets have many rea­sons to slow down, an­a­lysts and fund man­agers say.

So in­stead of get­ting 10 per­cent or more from stocks, which in­dex funds are on pace to de­liver for the sixth time in eight years, a bet­ter ex­pec­ta­tion may be for some­thing in the low to mid-sin­gle dig­its, many of the pre­dic­tions say. Few are ex­pect­ing losses for stocks. But for bonds, which have been stel­lar for decades, even a flat year could be con­sid­ered a vic­tory.

“We’re in a dif­fer­ent in­vest­ing en­vi­ron­ment,” says Heather Kennedy Miner, global head of strate­gic ad­vi­sory so­lu­tions at Gold­man Sachs As­set Man­age­ment. “It re­quires a lit­tle bit of a psy­cho­log­i­cal shift in mind­set, that in­vestors are go­ing to get paid less for each unit of risk in the next few years.”

Of course, an­a­lyst fore­casts have a long his­tory of be­ing wrong. Many mar­ket watch­ers were fore­cast­ing only mod­est gains for this year, for ex­am­ple. And even though big, un­ex­pected events re­peat­edly shook mar­kets, from the U.K. de­ci­sion to quit the Euro­pean Union to Don­ald Trump’s vic­tory last month, stocks still man­aged to turn in a bet­ter-than-ex­pected year.

Many things could trip up fore­casts for 2017, such as an un­ex­pected rip higher in in­fla­tion. More po­ten­tially mar­ket-shak­ing elec­tions are also loom­ing, in­clud­ing ones in the largest Euro­pean economies. Plus, the ul­ti­mate wild card still hangs over the mar­ket: Trump. In­vestors are no­to­ri­ously bad at deal­ing with un­cer­tainty, and they’re gird­ing for a world where big shifts in U.S. pol­icy may ar­rive via a late-night tweet.

Nev­er­the­less, the crux of fore­casts for more sub­dued re­turns in 2017 rests on sim­ple math. Stocks are no longer cheap, at least rel­a­tive to how much profit com­pa­nies are pro­duc­ing. And in­ter­est rates for bonds are low and ex­pected to be on the way up, which would mean their prices are set to drop. Here’s a look at what mar­ket watch­ers are think­ing:

STOCKS

A sim­ple way to mea­sure whether a stock is cheap or ex­pen­sive is to com­pare its price against the profit the com­pany is mak­ing. In re­cent years, stock prices have risen far more quickly than earn­ings, and that has many in­vestors ex­pect­ing slower gains ahead. “We are not dou­bling down with our clients’ money,” says Rich Weiss, se­nior port­fo­lio man­ager at Amer­i­can Cen­tury In­vest­ments. He’s been ratch­et­ing back stock in­vest­ments in the mu­tual funds that he runs. “It’s go­ing to be wait-and­see for us.”

When the fi­nan­cial cri­sis was still burn­ing in early 2009, the S&P 500 in­dex was trad­ing at the cheap level of eight times its earn­ings per share from the prior 12 months. Now, it’s trad­ing at 19 times, ac­cord­ing to Fac­tSet. At such lev­els, com­pa­nies will need to pro­duce big­ger prof­its to war­rant fur­ther gains in stock prices, an­a­lysts say. And while a pro­posed cor­po­rate tax cut by Trump would pro­vide an im­me­di­ate boost to earn­ings, strong eco­nomic growth has so far re­mained elu­sive.

Strate­gists along Wall Street, from Deutsche Bank to Gold­man Sachs, are pre­dict­ing the S&P 500 will climb to 2,300 or 2,350 in 2017. That’s less than 4 per­cent higher from where it was on Tues­day. Bar­clays is a bit more op­ti­mistic, tar­get­ing the S&P 500 at 2,400 by the end of next year, but that would still be less than the 7 per­cent rise in earn­ings that it’s fore­cast­ing.

Where many an­a­lysts are more op­ti­mistic is in cor­ners of the stock mar­ket that would ben­e­fit most from Trump’s pro­pos­als for lower taxes, less reg­u­la­tion and a stronger dol­lar. Chiefly, that’s smaller com­pa­nies, which tend to do more of their busi­ness within the United States. Wall Street also ex­pects the milder re­turns to last past this up­com­ing year. Strate­gists at Black­Rock see roughly 4 per­cent an­nual re­turns for big U.S. stocks over the next five years, for ex­am­ple. Still, that’s bet­ter than Trea­surys, which they fore­cast will re­turn closer to zero.

BONDS

Bonds have been ter­rific in­vest­ments for decades, de­liv­er­ing not only strong but also mostly sta­ble re­turns. That flipped on Nov 9. Fol­low­ing Trump’s vic­tory, in­ter­est rates be­gan jump­ing on ex­pec­ta­tions for faster eco­nomic growth and in­fla­tion, and the yield on the 10year Trea­sury note topped 2.60 per­cent this month, up from 1.86 per­cent on elec­tion day. Ris­ing rates mean newly is­sued bonds pay more in in­ter­est, but they also push down prices of bonds al­ready in mu­tual funds and in­vestors’ port­fo­lios. The largest bond mu­tual fund by as­sets had its worst month in nearly 13 years dur­ing Novem­ber, los­ing 2.6 per­cent.

“Bot­tom line, in a ris­ing-rate en­vi­ron­ment, things will be very choppy,” says Bernie Wil­liams, chief in­vest­ment of­fi­cer for USAA’s Wealth Man­age­ment In­vest­ment So­lu­tions. “But I don’t think we will have se­vere in­fla­tion, which is the rea­son to bail on bonds.” An­a­lysts are pre­dict­ing a fur­ther, and mostly grad­ual, rise for rates in 2017.

That has them fore­cast­ing slight losses to mod­est gains for the types of bond funds that tra­di­tion­ally sit at the core of a port­fo­lio. They won’t ap­proach the 5 per­cent-plus re­turns they’ve of­ten turned in dur­ing the past decade. “That said, a core bond port­fo­lio does still play a role,” says Brad Cam­den, di­rec­tor of fixed-in­come strat­egy at North­ern Trust As­set Man­age­ment.

“There’s a lot of op­ti­mism priced into the mar­kets, but there’s also a wide range of un­cer­tainty.” Cam­den ac­tu­ally sees it as an en­cour­ag­ing sign that bonds have strug­gled since the elec­tion: It shows that stocks and bonds don’t al­ways move in the same di­rec­tion, prov­ing once again the value of hav­ing a di­ver­si­fied port­fo­lio. When stocks hit their next down­turn, bonds will hope­fully once again hold steady.

“It’s there for hu­mil­ity,” says Brian Ja­cob­sen, chief port­fo­lio strate­gist at Wells Fargo Funds Man­age­ment. “We could be to­tally wrong about the out­look for the eq­uity mar­kets, and that’s when core bonds are go­ing to re­ally come in handy.” —

NEW YORK: In this Oct 8, 2014, file photo, peo­ple walk to work on Wall Street be­neath a statue of Ge­orge Wash­ing­ton.

— AP pho­tos

NEW JERSEY: In this Wed­nes­day, Oct 26, 2016, file photo, a shop­per, left, walks with a store as­so­ciate in the toy sec­tion at Wal-Mart in Teter­boro.

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