2017 Year-End Forecasts
Wells Fargo Investment Institute is expecting improving growth, normalizing inflation, higher equity prices, and two interest rate hikes in 2017.
2.1%
U.S. Gross Domestic Product (GDP) growth
2.2%
U.S. inflation
2230–2330
S&P 500 Index
1.00%–1.25%
Federal Funds Rate
Investment and Insurance Products: NOT FDIC InsuredNO Bank GuaranteeMAY Lose Value
Key Highlights
The last few years have, for the most part, been good for investors. But with the economic recovery heading toward its eighth anniversary in 2017, we see new global economic challenges and opportunities.
Click on any of these highlights to go to that section of the report for more information.
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Market Drivers
Five shifts, from the rise of the consumer in the United States to the impact of geopolitical events like Brexit, that will help shape 2017.
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2017 Economic and Investment Outlook
Will the market rise or fall? What will happen to interest rates? Our take on the economy and investment markets in the year ahead.
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2017 Focus Themes
We’re keeping our eyes on the divided economic recovery and changing demographics and how they will impact the world.
5 Market Drivers
In this video, Darrell Cronk, President of Wells Fargo Investment Institute, discusses five things that may impact the 2017 economic and investment outlook.
Economic and Investment Outlook
As we head into 2017, we are looking at the continuation of many trends, but we are starting to see things a little differently.
Late-Cycle Recovery
A solid labor market, improved consumer spending and housing activity, and modest recoveries in business inventories and investment spending should drive continued U.S. economic growth.
Positives:
- Unlike previous economic cycles, consumers have not increased debt levels and businesses have not loaded up on short-term debt that could compromise their balance sheets if interest rates rise.
- Wages should continue to improve.
- Stabilizing commodity prices should ease recessions in commodity-producing countries such as Brazil and Russia.
Risks to Our Outlook:
- Household debt remains a factor to watch in the future.
- Rising wages and housing price growth could help increase inflation.
- The impact of policy changes from new leadership in Washington, D.C., is unknown at this point.
Declining Household Debt Gives Consumers Spending Room
Past performance is no guarantee of future results.
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Sources: Federal Reserve System Flow of Funds Database, U.S. Bureau of Economic Analysis, and Wells Fargo Investment Institute, Oct. 25, 2016. Quarterly data and last point plotted is June 2016.
S&P 500 Index Could Post Only a Modest Gain
We are entering 2017 with a neutral equity stance compared to a year earlier. This is the first year of this market cycle for which we are not increasing our expectations for the year-end S&P 500 Index price/earnings valuation.
Positives:
- The Energy-sector earnings recession ended with the third quarter of 2016.
- U.S. consumers remain fairly healthy and should help drive consumption patterns.
- We expect a modest increase in international developed-market earnings.
Risks to Our Outlook:
- Emerging economies still face important challenges.
- An unexpected increase in inflation or expectations could result in higher-than-expected interest rates.
- If the European Central Bank or Bank of Japan decide to change their stance due to the perceived ineffectiveness of their monetary easing policies, it would be a major negative for financial markets.
U.S. Markets Have Outperformed Emerging Markets Since the Recovery
Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment.
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Sources: Bloomberg, Wells Fargo Investment Institute, Sept. 30, 2016.
Slow Rate Hikes With a Dose of Volatility
Our year-end target for the federal funds rate is 1.00%–1.25%. Longer-term yields will likely remain near current levels.
Positives:
- The results of the U.S. presidential election could point to fiscal spending programs in the U.S. in 2017.
- Inflation expectations remain at low levels.
- Global interest rates that are well below U.S. yields in many countries should provide support to domestic fixed-income markets.
Risks to Our Outlook:
- As prices have moved higher in credit, price upside appears limited.
- Municipal securities could come under pressure due to the expectations of lower tax rates and higher issuance points.
- An unexpected increase in inflation or inflation expectations could push interest rates above year-end targets.
Yields Are Tied to Inflation Expectations
Yields represent past performance. Past performance is no guarantee of future results. Yields may be lower or higher than that quoted above. Yield will fluctuate as market conditions change.
*Series is a measure of expected inflation (on average) over the five year period that begins from that date. Source: Federal Reserve Board of St. Louis.
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Sources: Bloomberg and Wells Fargo Investment Institute, Nov. 28, 2016.
Commodities Stabilize While REITs Brace for Volatility
The 2017 outlook for commodities is a neutral position after decent price gains in 2016. Some individual commodities may be able to break away from the growth rates of the sector as a whole.
Positives:
- Opportunity may exist in 2017 in “softs,” or commodities that are grown, like cotton, as well as in agriculture.
- Price volatility should abate relative to what was seen in 2016.
- Real estate investment trusts (REITs) performed strongly during most of 2016, and should provide mid-to-high single-digit total returns for 2017.
Risks to Our Outlook:
- There is little upside for gold and oil in 2017.
- If the U.S. dollar is weaker than expected, commodity prices could rise.
- If OPEC chooses not to defend oil prices from sinking back into the $20 per barrel range, there could be far-reaching commodity consequences.
Commodities Have Been Volatile
Data covers time period from Jan. 1, 2000 through June 30, 2016.
Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. Subsector levels represented by Bloomberg Commodity sub-indices.
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Sources: Bloomberg, Wells Fargo Investment Institute, June 30, 2016. Indexed to 100 as of 1/1/2000.
Alternative Investment Strategies Can Offer Exposure to Opportunities in Uncertain Times
After a difficult start to 2016, alternative investment performance rebounded, and the landscape is potentially ripe with opportunities for strategies such as Equity Hedge and Relative Value.
Positives:
- The potential for pullbacks and market swings creates opportunities for the Equity Hedge and Macro strategies.
- There may be Distressed/Special Situation opportunities in Europe, where there is uncertainty induced by Brexit.
- Private Capital currently represents one of the best ways to access compelling opportunities for qualified, long-term investors.
Risks to Our Outlook:
- Sudden pullbacks or rapid recoveries may not be an ideal environment for active management or alternative investment strategies that rely on following trends.
- Volatility from liquidity constraints or regulatory restrictions could lead to mark-to-market losses in the credit-sensitive strategies.
Hedge Fund Strategies May Offer Benefits When Interest Rates Are Rising
Date ranges represent periods when the Federal Funds Rate was increasing.
Hedge Funds represented by the HFRI Fund Weighted Composite Index. Global Equities represented by the MSCI World Index. Bonds represented by the Bloomberg Barclays U.S. Aggregate Index. This information is for illustrative purposes only. It does not represent any specific investment or the experience of individual investors. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment.
Sources: MPI Stylus, Federal Reserve, June 30, 2016.
Alternative Investments, such as hedge funds and private capital funds, are only open to pesons who are “accredited investors” or “qualified purchasers” within the meaning of the U.S. securities laws. They trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences. You could lose all or a substantial amount of investment in these products.
2017 Focus Themes
Understanding where the economy and investment markets are headed is about looking deeply at the underlying trends. These four themes are influencing how we move forward.
Investment Expertise and Advice That Can Help You Succeed Financially
Wells Fargo Investment Institute is home to more than 100 investment professionals focused on investment strategy, allocation, portfolio management, manager reviews, and alternative investments. For additional information on Wells Fargo Investment Institute, visit our website.
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