2017 Investment Outlook: Slow growth, higher interest rates
U.S. economic growth is likely to continue next year, albeit slowly, and the cost of borrowing could increase with the Federal Reserve expected to resume raising interest rates, according to 2017 outlooks from Wells Fargo Investment Institute and Wells Fargo Asset Management.
The U.S. economy should continue to slowly improve next year, though inflation may pick up and the cost of borrowing could increase as the Federal Reserve resumes raising interest rates after holding them steady since last December, according to two 2017 investment outlook reports from Wells Fargo’s Wealth and Investment Management unit.
Most leading indicators reported in the outlooks also show that, despite an aging recovery now in its eighth year, the job market should show modest improvement and a recession isn’t likely in 2017.
The 2017 investment outlooks — “Seeing Things Differently” and “Capitalizing on Change” — were released this week by Wells Fargo Investment Institute and Wells Fargo Asset Management, respectively.
Investors watching for policy changes from Washington
Still, investors should expect periods of volatility — particularly as tax, trade, immigration, and regulatory policies are hammered out by the incoming Trump administration and Republican-led Congress, said Tracie McMillion, head of Global Asset Allocation Strategy for the Institute and one of the authors of “Seeing Things Differently.”
“Investors will want to watch as President-elect Trump defines his policies in greater detail,” she said. “For example, rolling back regulations will likely be a positive for U.S. businesses. However, there are benefits to regulation — they were put in place to protect consumers — and a rollback could increase macro-risks over the long term.”
Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management and an author of “Capitalizing on Change,” agreed that financial markets will be closely watching what happens in Washington.
“I think investors will stay in their bullish mood as long as President-elect Trump stays on message with tax cuts and regulatory changes,” he said. “But if he decides to focus on tariffs or building walls rather than bridges, their mood could change.”
Trade was a major issue during the presidential campaign, and many companies with international exposure are concerned that trade barriers to protect U.S. jobs could have unintended effects, according to both Jacobsen and McMillion. These could include increasing the cost of imported parts and materials, or hurting exports if other countries decide to impose retaliatory tariffs on the U.S.
Global economic growth is expected to continue to improve, according to both outlook reports, with developed markets, such as Japan and Europe, continuing to grow more slowly than most emerging markets.
According to Jacobsen, small cap stocks, as well as financial services, health care, and industrial stocks all moved up quickly following the election on the prospect of deregulation — though sectors that are more sensitive to higher interest rates, such as housing, autos, real estate investment trusts, utilities, and telecoms did not.
“If inflation does pick up, and we don’t believe it’s going to accelerate too much, that doesn’t mean others won’t fear its return,” he said. “That can put further upward pressure on bond yields, and even put pressure on stocks if there isn’t real growth accompanying it.”
Fed hikes expected next year
The Fed, which has debated whether to raise interest rates since its last rate hike in December 2015, is widely expected to raise rates again when it meets on Dec. 13 – 14. According to McMillion, the likelihood of additional rate hikes has increased since the election.
“The Fed will likely raise the fed funds rate three times by the end of 2017,” she said. “We do see a gradual path on rates, and borrowers should consider locking in today’s relatively low rates. Inflation is still low by historical standards but if it increases more than we anticipate, rates could certainly follow.”
One key theme of the Institute’s report is that of the “agile investor.” Given the spectrum of economic policy changes that may take place during 2017, investors may be able to enhance their returns and mitigate risks by tactically shifting their asset allocations within a well-diversified strategic portfolio. For example, an overweight to large cap equities can take advantage of upturns in domestic equity markets.
“Historically, active strategies have outperformed passive strategies, such as index funds, in the later stages of an economic recovery,” said McMillion. “We believe both have a place and can be utilized together.”
Watch videos about the outlooks
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