2017 Economic Outlook

The long ordeal that was 2016 is finally over. Now that it’s over, and Betty White has been spared, we can reflect on the year that was, and turn an eye toward the new year. Once again, US GDP grew as expected last year, with annual figures likely to come in somewhere in the 2.1-2.5% percent range, which has been the average growth rate since the recession. As we’ll discuss, we do anticipate potential for increased growth in the coming year as many economic, policy, and regulatory headwinds dissipate. At worst, we expect the same slow growth to continue and expect the likelihood of an imminent recession to be extremely low. Inflation also increased in 2016, to a rate of almost 2 percent, and we expect this to increase further in 2017. Some inflation, perhaps counter-intuitively, is fundamentally good for the economy. When we expect goods and services to be more expensive tomorrow than they are today, we make purchases today, which means inventories need to be replenished, which puts people to work and gives them money to spend on the things they want and need. Without some inflation, the economy stagnates. Another driver of spending this year may be interest rates. With the Fed finally making good on promises to increase the rates they charge banks, we’ll see that increase reflected in higher mortgage rates. The expectation of higher future rates pushes fence-sitting potential buyers into the housing market. As a result we’ve seen, and will likely continue to see, increased sales of new and previously owned homes. The same will likely be true of any purchases which are typically made on credit, including automobiles and business capital items. An asset class that may be hurt by rising interest rates, however, would be bonds – specifically many bond funds. As newly issued bonds carry higher interest rates, the value of previously issued bonds, with relatively lower interest rates, should decrease. These changes should be reflected in the overall value of the funds that hold them. A downside of mutual fund investing is that, even though you may watch your values decrease, any gains the funds may have recognized from any of its holdings would be passed on to you. In other words, depending on timing, you can lose money AND end up paying taxes for the privilege. That being said, this is not a call to get out of bonds completely. Fixed income investments are an important component of most asset allocations, and typically perform less-well as economies improve and stock markets rise, yet they can act as a ballast when the inevitable downturn occurs. For the stock markets, 2016 was another very turbulent year. We saw a major correction in the first quarter of the year, followed by hesitant growth as energy prices increased, and the election cycle ground on. Surprises like Brexit and the US election threatened to derail the whole thing yet, so far, have had no negative impact. Understandably, many investors are still wary of both events, as their effects will begin to be felt in the coming year. For the US stock markets, we think 2017 should be a profitable year, with returns easily in the 10 percent range, although that bullishness must be qualified as we weigh President Trump’s ability to deliver on his promises to decrease corporate taxes, reduce inhibitive regulation, and reform prohibitive policies. If he is able to work with Congress and deliver, even moderate reforms, the economy should continue to respond well. Alternatively, if government continues to be mired in gridlock, we expect more of the same slow growth. If Republicans overplay their hand, as Democrats did in 2009, with an undue emphasis on social, rather than economic policy, we would expect the markets to act reflexively. A lot will become more clear within the first one hundred days of the new administration, but we are optimistic. Specifically, we feel there is opportunity in small and mid-sized US companies in the coming year, for several reasons. These companies tend to operate domestically, and would likely be less impacted by international strife, including increased populist sentiment which may result in unexpected election outcomes in France and Germany, as well as any unexpected side effects of the march toward Brexit. Additionally, these companies are less likely to be impacted by any retaliatory tariffs, if the new President makes good on some of his more isolationist rhetoric. Thirdly, the value of the US dollar has increased substantially relative to other currencies, making US exports relatively more expensive, even without tariffs, which should have a more limited impact on companies operating largely within the US. Internationally, we expect more of the same: countries doing well should continue to do so, those in trouble are unlikely to see much relief. While we don’t believe the EU will dissolve, we do expect there is enough political uncertainty in the region to hamper growth. Between populist uprisings in the election booth, refugees from the Middle East, and economic uncertainty caused by poor public policy and pending trade negotiations with the UK, we feel there is reason to be cautious when investing in Europe, although we do not expect an outright recession. With the exception of some of the smaller Southeast Asian nations, we are not overly optimistic about Emerging Market economies. The situation in many of the Latin American nations continues to erode. Growth in China continues to be slow. Russia will be an interesting economy to watch, as relations with the US may change markedly with foreign policy adjustments likely to be made by President Trump. From a fundamental standpoint, we believe the US is the most advantageous place to be invested for growth. If changes promised by the new US administration come to fruition, American companies, their employees, and shareholders stand to be the biggest winners. That being said, these are forward-looking statements; any number of domestic and international events could drastically alter this outlook. Be sure to work closely with your independent advisor to help ensure your investment strategy accurately reflects your goals and any changes in the economic landscape. Stephen Kyne is a Partner at Sterling Manor Financial in Saratoga Springs, and Rhinebeck, NY Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, an SEC registered investment advisor or Cadaret Grant & Co., Inc. Sterling Manor Financial and Cadaret, Grant are separate entities.