Monthly Outlook: January 2017

With every new year, we naturally have feelings of new beginnings, optimism and hope. We learn from our mistakes, promise to never make them again, and aim to be our best selves. With all of that, comes the urge to make predictions and show how enlightened and clued‐in we are. Well, if we learned anything in 2016, it’s that polls and predictions can be wrong! Brexit, Trump, Chicago Cubs – all proved that you can’t always foresee the future until it unfolds. So my only prediction for 2017 is this: Most predictions will be wrong, expect disruptions and unexpected outcomes, and stay flexible in your world view and certainly in your investments. There will be winners and losers and don’t think that you already know who they are.

Before we move on to 2017, let’s review the numbers. U.S. stocks experienced a down‐up year, first diving 10% in the first month and a half and then slowly recovering those losses. By July 1st, the S&P500 was flat. By the end of October, the S&P500 had gained 5.8% as most polls showed Clinton leading, meaning more‐of‐the‐same and predictable policies. What few investors saw coming was not only a Trump victory but a stock market rally to go with it. By year end 2016, the S&P500 gained 12.0%. The “Trump Bump” they called it. Financial stocks gained an amazing 22% while healthcare stocks lost 3%. Winners and losers based on guesses about Trump policy. We’ll see. International stocks only managed a gain of 1.4% for 2016. But again, we saw winners and losers: Europe was flat at ‐0.2%, Russia was up 47%, while Mexico lost 10%. Interest rates drifted flat to down for most of the year with the U.S. 10‐year interest rate sagging from 2.27% to 1.37% by July. But then inflation fears crept back in, the Federal Reserve raised the Fed Funds rate by 1⁄4%, and by year‐end the 10‐year rate was at 2.45%. As a result, bonds (Barclays Aggregate Bond Index) had a wild ride, but overall a modest total return of 2.5% for 2016. Anybody who accurately predicted all that a year ago is hired (after you show me the proof!). 2017 will surely bring us just as many surprises and opportunities for investment. We are intent to stay flexible in our allocations and invest with the trends. Volatility is here to stay and we’ll strive to capture the growth where we find it and avoid the losses by selling the down‐trending markets. 2017 is sure to reward flexible investors and punish stubborn buy & hold thinkers.

Predicting the Present

As we move into 2017, we know there is a global wave of nationalism and closing of borders. Brexit, Trump, and Italy all show that rising populism is driving new policies involving immigration, trade, taxation and more. More countries, including Germany and France hold elections in early 2017. Investors knee‐jerk react to these changes and move certain asset classes up or down dramatically. But it’s very likely that we don’t even fully understand some of the new policies, the unintended consequences of the changes, and whether they’ll actually be enacted. Barron’s newspaper surveys 10 leading economists each year and asks for their 2017 forecast. They all – all 10 – predict the S&P500 to be about 2,400 at year‐end, give or take 50 points. And 8 of the 10 favor the U.S. financial sector (which already gained 22% in 2016). Given our experience with predictions, shouldn’t we at least consider alternative outcomes and be prepared? Our iFolios strategy uses multiple asset classes and “trend‐ following.” We’re open to investing in bonds of various types, stocks of various sizes and countries, commodities, currencies, and even inverse funds. It’s all fair game. And we’ll use trend‐following to predict the present – what’s actually happening – rather than trying to predict the future.

Wealth is Relative

If we’re right that a global trend toward disruption and surprises lies ahead, it’s important to remember that the goal of investing is to grow your wealth, and with acceptable risk. That means more money, in real terms after inflation, and relative to others. We understand that. We can do that by carefully capturing growth and avoiding losses over a complete cycle. Cheers ‐ to your health and wealth in 2017.