In 2016, financial markets, the economy, and geopolitics experienced an unusual number of milestones. While markets are testing new directions, it's easy to overemphasize change, putting a spotlight on uncertainty and playing up the worst case scenario. The way to assess the new dynamic is not to ask, "What's broken?" or "What's fixed?" but "How will business, markets, and the economy adapt?" Being prepared for 2017 is about gauging the milestones, understanding their significance, and responding without overreacting.
The LPL Research Outlook 2017: Gauging Market Milestones, contains financial market forecasts, economic insights, and investment guidance for the year ahead. Some of LPL Research's expectations for the upcoming year include:
- Accelerating U.S. economic growth*. LPL Research expects the U.S. economy - as measured by real gross domestic product - may grow modestly to near 2.5% in 2017, after spending most of the seven-plus years of the expansion averaging just over 2.1%. The potential growth lift is based upon expectations that rising business investment and fiscal stimulus may complement steady consumer spending. The details and timing of the passage of President-elect Donald Trump's proposals on taxes and infrastructure, and the speed of implementation will be important growth impact factors in 2017.
- Mid-single-digit returns for the S&P 500**. LPL Research forecasts mid-single-digit returns for the S&P 500 in 2017, consistent with historical mid-to-late economic cycle performance. Gains will likely be driven by mid- to high-single-digit earnings, growth and stable valuations (a stable price-to-earnings ratio of 18-19). In addition, LPL Research expects the current bull market to research its eighth year. However, gains will likely come with increased volatility as the economic cycle ages further and interest rates may rise (bond prices fall), increasing borrowing costs and making bonds a more competitive alternative to stocks.
- Limited bond return environment. LPL Research expects the 10-year Treasury yield to end 2017 in its current range of 2.25-2.75%, with a potential for 3%. Scenario analysis based on this potential interest rate range and the duration of the index indicates low- to mid-single-digit returns for the Barclays Aggregate Bond Index. The recent rate hike shows the Federal Reserve may start gradually normalizing interest rates in earnest. Importantly, rising interest rates, along with a pickup in the pace of economic growth and inflation, will limit return potential.
For additional insight, view the complete LPL Research Outlook 2017: Gauging Market Milestones.
This research material was prepared by LPL Financial, Member FINRA/SIPC.
*Our forecast for GDP growth of 2.5+% is based on the historical mid-cycle growth rate of the last 50 years. Economic growth is affected by changes to inputs such as business and consumer spending, housing, net exports, capital investments, and government spending.
**Historically since WWII, the average annual gain on stocks has been 7-9%. Thus, our forecast is in-line with average stock market growth. We forecast a mid-single-digit gain, including dividends, for U.S. stocks in 2017 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid- to high-single-digit earnings gains, and largely stable price-to-earnings ratio (PE). Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2017.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in falling market.
Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
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