The new year is a few weeks away, and with the turn of the calendar come questions about what 2017 will have in store for investors.
At Edward Jones, we believe 2017 will pick up where 2016 left off – slow but positive economic growth in Canada, steadying global expansion and low interest rates. We don't think the bull market is exhausted, but as it extends, it is likely to be more susceptible to bouts of volatility in response to global risks. As conditions shift, we believe global diversification and an opportunistic approach to volatility can help reward long-term investors.
Our outlook for 2017 starts here at home, where we think the Canadian economy will remain in low gear. The pace of domestic expansion slowed recently under the weight of falling oil prices, with GDP increasing at the slowest rate so far during this recovery.
We do not think 2017 will bring a dramatic shift in one direction or the other. Instead, we believe growth will come in near the mid-1% range, as the pace of growth is driven by a few key elements.
First, consumer spending. This is the largest component of the economy and has been the steadiest contributor to growth in recent years, boosted by rising debt levels. However, lackluster hiring and wage growth, along with a slower appetite for new consumer borrowing, may lead to slightly slower spending growth this year.
Closely tied to this is the housing market, which we expect to moderate. Real estate activity and investment have provided an above-average contribution to GDP during the current recovery. This is a trend we expect to slow this year due to increased regulations, elevated prices in the largest markets and more modest construction activity.
On the plus side, we think the loonie will play a role in economic growth. We expect exports to provide a boost to growth this year, helped by the combination of increased demand from the U.S. and the low loonie, which makes Canadian goods and services more attractive to foreign buyers. We think the loonie is likely to remain below $0.80, driven by low oil prices and a persistent gap in interest rates between Canada and the U.S.
Other key market influences in 2017 will be interest rates and oil.
Our outlook for rates in 2017 includes three distinct trends:
As for oil, we anticipate oil prices to remain somewhat range-bound around current levels. A more stable price environment could incentivize a rebound in production that, along with elevated inventories, is likely to act as a ceiling for prices in the near term. At the same time, improvements in global growth and/or OPEC strategies to limit production growth should limit future downside for prices.
Turning to a global perspective, we expect world growth to remain somewhat subdued, but tick higher, led by improvement in the U.S., where a healthy labor market and potential fiscal stimulus initiatives offer support. Developed markets like Europe and Japan face long-run challenges to growth, but we believe 2017 will see ramped-up stimulus from central banks and governments that can promote modest improvement. Meanwhile, after several years of deceleration, we believe growth in China will begin to level out around 6%. Overall, we think the potential for an uptick in global growth should support international investment performance.
With those conditions as the broad backdrop, this brings us to the outlook for the stock market. Overall, we think leadership across global asset classes will rotate in 2017. We don't expect the TSX to outpace global markets like it did in 2016, but domestic equities should see some support from stabilizing oil prices and an expanding, albeit modest economy. Over the past 60 years, when the Canadian economy grew between 1% and 2%, the TSX delivered an average return of 10% and the S&P 500 gained 16%.1 We think U.S. stocks will benefit from a rebound in corporate profits, helping offset above-average valuations.
We think 2017 can be another solid year for investors, remaining on the path of modest economic growth and relatively low interest rates. Existing global risks, along with unforeseen shocks, will make the path rockier, however, warranting a sound strategy, broad diversification and timely adjustments.
Talk with your Edward Jones advisor about ways to help you stay on track in 2017.
1Bloomberg, total return of S&P/TSX Composite index and S&P 500 index. Past performance is not a guarantee of how the market will perform in the future.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.