Many U.S. citizens and investors are sighing in relief that 2016 is over but are trepid about what 2017 may bring. Last year was good for certain parts of the stock market, but those gains did not improve most investors' balance sheet due to extreme uncertainty and a substantial variance in sectors. The new year carries over significant ambiguity around a new administration, new monetary policy, and a debt crisis in Europe.
Energy was one of the best performers in 2016 after hitting bottom in February and rebounding 25 percent. Financials soared on hopes of less regulation and higher interest rates. The health care sector fell into negative territory. Europe did not participate in our euphoria and China devalued their currency to keep up with our rising interest rates. This was definitely not an average year.
Wall Street analysts overall missed the market reaction to a Trump victory, thinking there would be an emotional reaction to the down side. In reality, the improved earnings induced much of the rally and better corporate earnings will likely continue through 2017. Many investors wanted to be on the sidelines after a negative October and the pending election and have not found a good entry point since. Meanwhile fixed income-investors are seeing dwindling values in their bond portfolios as yields rise and share prices fall. This interest rate phenomenon spread to other sectors also, such as real estate investment trusts and anything valued in currencies other than the U.S. dollar.
So 2016 was a very mixed bag depending on when and where you were invested. While the best performance was in domestic large company manufacturing, industrial and financial stocks, most other sectors were average at best. The valuations became very rich as stock prices were pushed higher in anticipation of better earnings going forward.
In the new year, we are faced with many challenges. These include rich stock valuations, diminishing bond prices, growing debt issues in greater Europe, and currency and trade issues with Asia and Mexico.
There remains hope that the economy will grow, unemployment will remain low and interest rate hikes will be gradual enough not to disturb progress. If taxes are cut and health care expenses are reeled in, then the consumer can benefit through savings. Wages will likely rise along with some inflation.
Research analysts are predicting an average year in equity returns, with lower bond prices and struggles with a very strong dollar and pressures on banks in Europe. However, sentiment is high and the momentum of positive returns has carried over despite a few down days in early January.
Wise investors will watch for opportunities in sector rotation and be careful not to assume last year's winners will repeat. For example, health care went from the worst performer last year to one of the best so far this year. Energy also switched places along with banks. Watch the elections in Italy, France, Holland and Germany. Europe is either voting for or against austerity and the survival of the EU (European Union). How the European Central Bank can support countries swimming in debt remains to be seen.
Consumers will need patience as we wait to see how changes unfold. It will be virtually impossible to tackle all the campaign promises in the first quarter. We don't see recession in the near term, but any surprise worldwide could easily pull back a record high stock market. The vigilant, patient investor can reap good rewards despite several underperforming and perhaps overpriced sectors. Fixed income holders will be challenged to stay positive and keep up with inflation. Creating a solid long-term plan with tactical exposure through dynamic allocation will be crucial as we navigate 2017.
Patricia Kummer has been an independent Certified Financial Planner for 30 years and is president of Kummer Financial Strategies Inc., a Registered Investment Advisor in Highlands Ranch. Kummer Financial is a six-year 5280 Top Advisor. Please visit www.kummerfinancial.com for more information. Any material discussed is meant for informational purposes only and not a substitute for individual advice.