Stock markets, bond markets, the economy, policy — some years they push and pull on each other lightly as markets follow their own path; in others, one influence, such as monetary policy, dominates. But sometimes, often following a period of change, understanding the pushes and pulls and how they might interact becomes a key to reassessing market dynamics for the next year and beyond.
2016 was a milestone year, a year of important changes for markets, the economy, and certainly politics. S&P 500 corporate earnings turned positive reversing more than a year of declines. After a one-year hiatus, the Federal Reserve raised rates for the second time in the current cycle, in what might finally be the start of a more regular path to interest rate normalization. Fears of deflation shifted to talk of “reflation.” Oil ended a multi-year decline that saw prices fall from over $110/ barrel in 2011 to a low of just over $26 in February 2016. And most dramatically, the American electorate rebuked the political establishment by choosing the nation’s first president who has held neither a prior political office nor high military rank, but instead has built an entire career in the private sector. The U.S. election, along with the U.K.’s referendum vote to leave the European Union (EU), may also come to be viewed as important milestones, if it leads to nations shifting away from a decades long trend toward increased globalization.
We have already seen a number of changes taking place as markets try to assess the dynamic new environment. Heading into the New Year, interest rates have moved dramatically, cyclically oriented value stocks have asserted market leadership, and oil prices found a new foothold as several major oil producing countries agreed to production cuts. New gears have been engaged, energy is building in some places, relief valves have let off some steam in others, and market drivers have been hoisted and repositioned. Being prepared for 2017 is about gauging these market milestones, understanding their significance, and responding without overreacting. The way to assess the new environment is not to ask, “What’s broken?” or “What’s fixed?” but “How will businesses, markets, and the economy adapt?” The theme for tackling the investment environment should be similar. Read the gauges and make adjustments, while staying strategic and maintaining a long-term view.
Gauging the market milestones as they impact 2017 will require a good plan and the right attitude. It’s about smart, not fast; patience, not impulsiveness; judicious adaptation, not careless return-chasing. After a momentous year, use LPL Research’s Outlook 2017: Gauging Market Milestones to help keep a firm but responsive touch on the controls and eyes on the right gauges as you pursue your financial goals.