Top 3 Surprises For 2017

January 26, 2017

Our Top 3 Surprises For 2017

Interest rates are not going to rise significantly higher in the next 12 months

The post-election conventional wisdom around Wall Street goes something like this: The new administration’s pro-growth agenda will include massive fiscal policy measures that will increase borrowing and push rates significantly higher.

Even though we think some of the president-elect’s agenda will move swiftly through Congress, much of the proposed spending will be kept in check by a Republican caucus committed to offsetting any new expenditures with budget cuts. The net result, in our view, will be less pressure on interest rates than expected.

The current Federal Reserve is notoriously conservative, and although it has targeted three rate increases for 2017, we think it will be resigned to a similar destiny as in 2016—a single rate hike—due to less-than-stellar demand as we enter the late stages of this economic expansion.

Many pundits are quick to make decisions based on short-term events (such as a new administration’s proposed policies), but there are long-term structural issues such as wealth inequality, low productivity, excess debt levels and unfavorable demographics that extend beyond our borders. In our view, these are leading contributors to sluggish worldwide consumer demand and will weigh heavily against the Fed’s willingness to aggressively raise interest rates anytime soon.

Diversification will regain favor among portfolio managers and investors

While diversification is part of ClearRock’s DNA, many investment advisors and investors have drifted into market timing, chasing performance and generally taking more risk than is prudent for their clients.

Those who have successfully pivoted into 100% U.S. stocks over the past three years have been rewarded with an annual return for the S&P 500 of more than 8.80%. Few investors, however, actually realized these returns. Studies by Goldman Sachs and Dalbar prove that most individual investors consistently underperform the market benchmarks due to market-timing decisions. (This “behavior gap” is usually motivated by emotions and a lack of sound judgment.)

 

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