2016 will go in the record books as one of the most eventful years for investors since the global financial crisis.
After a sharp sell-off to start the year posting the worst January for US Stocks in history, major geopolitical events such as Brexit, an unexpected Trump victory in the U.S. presidential election and a resounding “no” vote against the Italian referendum, stocks were on a wild ride.
However, equity markets once again demonstrated their resilience, as the S&P 500 crossed 2,200 for the first time ever in November and the Dow Jones Industrial Average could cross the 20,000 threshold sooner rather than later.
Nonetheless, with equity markets having moved significantly since the beginning of November, investors should be mindful of a few things going into 2017.
First, a rapid appreciation of prices with no meaningful improvement in earnings has left valuations feeling a bit high, with the forward P/E (Price to Earnings) ratio of the S&P 500 sitting at 17.1x, well above its long-term average.
Second, the U.S. dollar has reached its highest level in 14 years in the wake of the presidential election, and a strong dollar has traditionally been a headwind for the earnings of large companies with significant international exposure (because foreign consumers have to pay more for goods in their local currencies.)
Taken together, these factors lead to concerns. While there are reasons to be optimistic about 2017, notable risks still remain. The hopes and dreams that this late-year rally have been built on will need to translate into stronger fundamentals for current stock price levels to be sustained.
We have confidence that our AFP Defined Risk Strategy will provide our clients continued participation in stock market gains, while at the same time provide some much needed downside risk management in the event of a major correction. 2017 may prove to be another year where our strategy provides a better risk adjusted return than the overall stock market.
Please let us know if you have any specific questions or concerns. We thank you for the opportunity to serve you and your family in the New Year.