2017 Economic & Investment Outlook Edition

2017 Economic & Investment Outlook Edition

2016 was an amazingly eventful year! As this chart shows, it was quite a rollercoaster ride for the U.S. stock market as well.

Economic Expectations for 2017

1. U.S. stocks have a positive single digit % change. This comes on the heels of the strong year-end 2016 rally. However, we know a 10% or greater downside correction happens on average every 1-2 years, so we expect at least one more volatile downside period somewhere along the way. We believe Trumponomics helps Industrials, financials and consumer discretionary sectors of the stock market.

2. U.S. corporate earnings rebound strongly above the 6% long term trendline in 2017. We believe this rebound trend has already been in the cards. Trumponomics, especially lower corporate tax rates and a lower regulatory environment, should make this prediction more likely. As discussed in prior client meetings, investors in stocks need earnings to do well to keep pace with rising interest rates and inflation. Otherwise, stocks will face stormy seas.

3. Small/Mid cap International and Emerging market stocks face headwinds. Commodity strength helped emerging markets in 2016, but commodities are unlikely to have the continuing strong rebound they had in

2016. Trade policies may negatively impact many of these developing countries. Even though we doubt there will be actual trade wars, there may instead be lots of trade skirmishes. The U.S. dollar may continue to strengthen, creating more headwinds for these stocks.

4. Most high quality bonds may have a lackluster year. Rising interest rates will create lower returns for existing bonds in 2017. Trumponomics may accelerate the rise in rates (market based and from the Federal Reserve), and we may see one or more bond market selloff similar to what happened after the Trump election victory.

Despite high quality bonds having lower expected returns in the near future, they remain a good “shock absorber” area for client portfolios, especially if heightened geo-political tensions around the world erupt into something more onerous.

5. Alternative asset classes (including real estate and commodities) continue to provide good returns and good cushioning to higher stock and bond volatility. We continue to like alternatives for their lower correlations to traditional bonds and stocks.

6. U.S. economy grows around 2.75-3%, somewhat better than 2016. If Congress and the Trump administration can get fiscal policy spending right (balance of fixing existing infrastructure and encouraging innovation infrastructure for the future), then the possibility exists of the GDP breaking out above 3% in 2017 and beyond.

7. Consumers in the U.S. (70% of the economy) remain resilient. The rise in consumer confidence after the Trump election should continue to create decent consumer spending. This is one factor of several that points to a continued low probability of recession in 2017.

8. Inflationary forces may finally overwhelm deflationary forces, resulting in higher inflation in the 2.5 – 3% range. This is a lower conviction expectation for 2017. Trumponomics is a version of Reaganomics 2.0, only the stimulus is being done in a low unemployment, low interest rate world, rather than the high unemployment, high interest rate world of the early 1980s. Overheating of the economy and labor inflation are increasingly possible, although technology and automation trends remain powerful deflationary forces.

9. Employment trends remain good, but not great. It’s hard to see any surprises on the upside here, with unemployment already so low and robotics being utilized more and more in industries outside of manufacturing.

Given automation trends and the fact that hundreds of thousands of jobs are created and disappear every month, we have less conviction that Trumponomics will improve the job picture materially. However, high credibility industry sources tell us more small businesses are more confident in Trumponomics and are planning to expand in 2017.

A number of larger Fortune 500 companies are also trying to align their business strategies with the incoming Trump administration, creating more U.S. job opportunities. The real key here is how much these companies will balance hiring with more automation, and how re-training existing workers progresses, especially since we currently have over 5 million unfilled jobs in the U.S.

10. Higher interest rates finally materialize, modestly increasing mortgage rates and business borrowing costs. We may see 2 or 3 more Federal Reserve interest rate hikes in 2017 as a result of Trumponomics. Borrowing costs for consumers and businesses will be higher than in recent years, but still below long-term averages.

The Vermillion Summary

We believe the economic outlook for 2017 is reasonably good.

Uncertainty lies with how many parts of Trumponomics will be implemented, and how complex global supply chains, as well as countries in those supply chains, react to mixed messages they will see and hear from various component parts of the U.S. government in 2017.

Economic Trend forces are still powerfully affecting the economic and investment landscape. They will in some cases help the incoming Trump administration and in other cases create strong headwinds to change.

We strongly encourage our clients to look beyond the above “base case” economic expectations for 2017 and maintain the investment plan that you and your Advisor have designed based on your long-term goals and objectives.

Instead of trying to time market conditions or constantly switch investment holdings to try to take advantage of a moving economy, sticking to your long-term personal investment plan will be far more beneficial.

Wishing you a prosperous 2017,

Your Vermillion Financial Advisor’s Investment Advisory Team:

Mark, Bob, Jeff, Phil, and Beth.

Note: The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Please remember that past performance of investments may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this post serves as the receipt of, or as a substitute for, personalized investment advice from Vermillion Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed within this newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.

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