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Financial Industry Insights from Advisors Asset Management
On December 19, 2016
AAM Viewpoints – A New Year’s Resolution: Patience…
From time to time we like to revisit some of the time-tested attributes that we believe separate successful investors from the not so successful, and patience is definitely one of those attributes near the top of our list and worthy of discussion. Of course the markets themselves try to convince us otherwise. Let’s look at small-cap stocks as an example. Using the S&P 600 as a small-cap proxy, we see they hit a near-term low on 11/3/2016 right before the election and have a total return of 20.40% since then (11/3/2016 – 12/15/2016). So an investor might say, “Why do I need patience as I could have made 20.47% in six weeks?” However, right before this rally began there were many strategists heralding caution as the elections approached especially if the very unlikely occurred and Mr. Trump won, thus we don’t believe many investors stepped in right around this near-term low.
As you know, we were much more upbeat prior to the election, believing the U.S. economy would be stronger and the equity markets higher in the year to come regardless of who was elected. In addition, looking farther back, we see that this recent rally began from a level that small-caps first achieved about 22 months prior (12/29/2014), so essentially small-cap stocks had been treading water for this almost two-year period. When we add in this recent rally we see small-caps have a total return of 23.72% for this period (12/29/2014 – 12/15/2016) and an annualized total return of 11.44%, which we believe reinforces the potential of being a patient long-term investor.
Of course patience can serve us well in other endeavors. It is said that we have just gone through one of the most contentious elections in history (don’t we say that every time?) which seems to once again have divided the nation into two distinct camps. The first group – based on their protests and commentary – seems to believe that President-elect Trump is going to drive the United States to ruin with his new brand of shoot-from-the hip Washington politics. For them we offer the gentle reminder of the mid-term elections which have been known to quickly right the ship if it goes astray. The second group believes Trump will, as he stated throughout the election, make America great again. Based on the stock market’s reaction, one might believe this group has the upper hand at the moment. However, we would like to remind people that Rome wasn’t built in a day nor was it destroyed in a day. It should also be noted that the truth usually lies somewhere in the middle.
As we stated prior to the election we felt that the stimulus that would come from a new administration (whether Democratic or Republican) would serve the U.S. economy well and hopefully keep the equity bull market alive. However, a 5.99% rally for the S&P 500 since the election (11/8/2016 – 12/15/2016) seems a bit robust no matter how stimulative the new administration’s policies prove to be and remember it is going to be some time, months and even years, before a lot of these policies hit.
Looking over the horizon into 2017 we think it might be appropriate to also review part of our 2016 thesis. The FOMC (Federal Open Market Committee) just raised the federal funds rate by 25 basis points making that the only move of 2016 and only the second move since the Great Recession began. Last year we felt the FOMC would move one or two times in 2016 and our outlook for 2017 is the FOMC will most likely move to raise rates two or three times. This should continue to press rates higher and we see the U.S. Government 10-Year Note continue its move from its current level of 2.60% toward 3%, which we discussed last year as a near-term upper bound.
We felt oil would bounce significantly approaching $50 by year-end 2016 and the current quote is $51.11. We would target $60 by year-end 2017 and hopefully we will encounter a slightly less volatile year for oil in 2017. For equities we envision the bull market continuing well beyond its 8-year anniversary on 3/9/2017 driven by a continued rebound from the recent earnings recession and a strengthening U.S. economy. We see the S&P 500 moving through 2500 and a total return range of 10-14% for the year. For 2016 we were targeting the equity markets to bounce back from their anemic returns in 2015 with the S&P 500 returning in the 8-12% range. We are happy to announce that with a handful of trading days left we were so far we a bit too pessimistic as the S&P 500 has a year-to-date total return of 13.04% (12/31/2015 – 12/15/2016).
In a nutshell, given the big moves equities have made and the uncertainty of the big changes in Washington actually seeing the light of day it is definitely a time for investors to stay patient, diversified and somewhat cautious, in our opinion. In addition, they should not be surprised if we see a bit of a correction – buy on the rumor, sell on the news – as the New Year comes into play and the new administration takes office. Remember, at one point in 2016 the S&P 500 was down 10.51% (12/31/2015 – 2/11/2016). We would encourage investors to use this time to consider rebalancing and possibly add exposure to the equity markets.
CRN: 2016-1205-5669 R
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com.
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