Mid-year Outlook 2017

By Craig Fehr June 20, 2017

We're halfway through 2017 and plenty has transpired so far this year, setting the stage for what's to come. Between the domestic influences of oil and housing prices, post-election changes in the U.S., worldwide political developments, persistently low interest rates and stock market gains, we believe investment conditions will be influenced by the mix of headwinds and tailwinds. Looking ahead, we think there are compelling opportunities ahead for Canadian investors, making this a good time to review and adjust portfolios to ensure you're appropriately positioned.

So what do those opportunities look like? Let's focus on our outlook in four key areas: the economy, the stock market, interest rates and the global environment.

  • First – the overall economic outlook, where we think broadly improving economic growth in North America forms a reasonably solid foundation for investment performance ahead. That said, a modest pace of expansion in Canada and faster growth in the U.S. against a politically charged backdrop pose a mix of risks alongside opportunities.
    As the enthusiasm of the Trump rally wanes, the upside of pro-growth reforms is likely to be met by periodic disappointments as policy proposals are adjusted and delayed. We think this will produce ongoing changes in leadership among equity sectors. We recommend rebalancing sector allocations by trimming overweight exposures in sectors that have outperformed since the election and adding to those that have lagged during the recent run. Additionally, we think imbalances in the domestic economy, including a softening housing market, volatility within commodity-based industries and slow business investment will hold back growth, warranting a slightly reduced domestic equity allocation, as we think an increased international allocation remains appropriate.
  • Second, when it comes to our outlook for stocks1,  we recommend a combination of offense and defense. Within a neutral weighting to equities, we think portfolios will benefit from an exposure to small- and mid-cap equities – particularly within the U.S. – as faster economic growth supports more cyclical, or economically sensitive, asset classes and companies. Additionally, we think the potential for periodic pullbacks has risen given strong market gains and above-average valuations. But against the backdrop of what we think will be continued improvement in economic and corporate fundamentals, we think pullbacks represent opportunities, and we recommend buying the short-term dips.
    To play defense, broaden asset class and sector diversification. You can do this by building a base of Canadian, U.S. and overseas large-cap equities, along with small- and mid-cap stocks, real estate and emerging market equities. And we suggest trimming overweight exposures to domestic financials and other cyclicals, rebalancing into areas with more defensive earnings and business lines, such as health care, telecommunications and consumer staples.
  • Our third area of focus is fixed-income investments2, where investors are presented with opportunities amid shifts in the interest rate environment. We think domestic rates are likely to remain fairly low for a while longer, held back by a sluggish economy, low inflation and patient central bank action. Meanwhile, the U.S. Federal Reserve is expected to raise rates again in the coming months, ushering in a new monetary policy environment after many years of unprecedented stimulus. Given these factors, we think a neutral weighting to fixed income is appropriate for diversified portfolios. While low interest rates might feel like a reason to avoid bonds, we think the likelihood of rising stock market volatility raises the value bonds offer in terms of portfolio stability. More specifically, we think now is a good time to reduce exposure to high-yield or junk bonds in favour of investment grade bonds, where the risk-reward tradeoff appears more favourable.
  • And, last, looking at international investments in the context of your portfolio3, we recommend an allocation toward the high end of our international range. We believe overseas developed-market large caps are attractive given credible signals of continuing economic improvement in many overseas markets, along with lower valuations. Despite what we believe are full valuations, we believe U.S. large-, mid- and small-caps are still compelling, as well, based on the prospects of faster expansion and the support that offers for rising corporate earnings.

Talk with your Edward Jones advisor today about opportunities in today’s market and adjustments you can make to ensure your investments are aligned with your goals well beyond the next half of 2017.

Important information:

1Equity investments carry risk, including the loss of principal. The price of small cap and mid cap stocks are generally more volatile than large company stocks.

2Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

3There are special risks inherent in international and emerging markets investing, including currency, withholding taxes and high levels of taxation, and political, social and economic risks.

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