Q: What’s the Outlook for the Stock Market in 2017? A: Before we Look Forward, It’s Helpful to Look Back

The writer is the Chief Investment Officer at Fenimore Asset Management headquartered in Cobleskill, NY with a branch office in Albany. 2016 The stock market experienced a number of ups and downs during last year, but finished strongly producing a double-digit gain for 2016. The year began poorly with stocks declining through the second week of February; however, initial concerns over a global recession proved to be unfounded and the market rebounded. Election results had a major influence on stock markets around the world. In June, a surprise vote by the United Kingdom was the catalyst for a quick market decline of -5%. The even more surprising U.S. elections led to a major rally with the U.S. stock market increasing by almost +5% from Election Day through year-end. 2017 Given the number of surprises in 2016, the only thing I am sure of is that there will be more surprises in 2017. The startling election of Donald Trump caused a reappraisal by investors about the future prospects for a variety of businesses. The major economic items from the Republican platform appear to be lower corporate and individual tax rates, increased spending on infrastructure, and less government regulation. Investors are anticipating these potential changes will lead to higher growth, inflation, and interest rates. In response, after the election, interest rate sensitive stocks underperformed the market while stocks that will benefit from lower taxes and higher interest rates outperformed. Despite the political change, the economy looks very familiar. Overall, growth has maintained a modest pace, unemployment continues to decline, housing is recovering, and, despite the recent increase, interest rates are low by historical standards. Meanwhile, Corporate America continues on its recent course. Most managements are forecasting low, single-digit, organic growth rates in 2017 and a continued focus on increasing profit margins. I also expect growth in dividends per share and stock repurchases. Consequently, this could be a record year for corporate earnings. I should point out that the stock market has already anticipated this good news. The price-to-earnings ratio on the S&P 500 Index is the highest in more than a decade and many individual stocks that I look at are trading at, or above, my estimate of fair value. Despite the ever-changing landscape, I am sticking with my time-tested investment approach. Last year, I visited or talked to numerous companies and met with managers, competitors, and customers in pursuit of knowing these companies as well as possible. I believe this in-depth research — a persistent pursuit of high-quality businesses with great management teams — combined with patient, price-sensitive portfolio management, is the best way to preserve and grow wealth over the long term. It benefited me greatly in the past, including 2016, and it should continue to help me despite the surprises we will all certainly face in 2017.