Economic and Investment Outlook for 2017
• Economic Growth: Real GDP growth should remain near 2.2% for 2017 for the U.S. The economic benefit of lower expected taxes and fewer regulations is expected to exceed the costs of any new trade restrictions. Thus there is potential for higher economic growth. Inflation is expected to increase modestly in the U.S. and to stay relatively low for most developed economies. Unemployment in the U.S. is expected to stay low, but improvement may be more difficult as the labor markets are already tight. The probability for a recession or financial crisis appears low for the next few years. Slightly lower growth rates are expected for the rest of the world, with unemployment rates generally higher, but declining from recent peaks.
• U.S. Stocks: A strong U.S. dollar may cause multi-national U.S. companies to continue to experience sales and earnings deceleration. Elevated valuations and slowly rising interest rates are headwinds to U.S. stock prices. Rising wages and weak productivity growth may begin to squeeze profit margins in the U.S. However, lower corporate taxes, lower regulatory costs and lower import costs due to the strong dollar can provide an offset for the coming year or two.
• Foreign Markets & Currencies: Economic conditions in larger foreign developed countries are expected to continue to improve on average, especially in Europe, thanks largely to continued quantitative easing monetary programs and cheaper currencies. Some fiscal stimulus may be added, which would provide further economic and earnings growth. The currency declines should boost exports by foreign firms at the expense of U.S. firms, offsetting any new modest U.S. trade barriers. China should not be labeled a currency manipulator as their efforts the last few years have been to support their currency, not depreciate it.
• Fixed Income: U.S. interest rates are higher than rates in Europe and Japan, thus U.S. bonds are attracting yield-seeking and safe-haven investors from outside the U.S. Therefore, U.S. interest rates may continue to stay low for an extended period despite the Federal Reserve’s plan to increase short-term interest rates. Interest rates are expected to rise as unit labor costs rise, triggering a modest rise in inflation. Adjustable rate mortgages and bank loans can still provide attractive yields and total returns in a rising interest rate market. Corporate default rates are expected to remain below average.
• Investment Expectations: After adjusting for slowly rising inflation and interest rates, investment returns from most U.S. stocks and credit-sensitive bonds over the next few years are expected to be somewhat below returns of the recent past. Foreign stock market returns are expected to be muted, but likely better than what can be expected from the U.S. However, there will be firms that benefit from lower taxes, more pricing power, higher interest rates and a strong labor market. Others will be unaffected by trade issues and will benefit from lower regulations. Thus for the discriminating investor, there will be ample favorable stock and fixed-income investment opportunities available in 2017.