Outlook 2017: Where Should You Invest in 2017?

By Kate Warne December 16, 2016

After a year of surprises in 2016, Americans are wondering what the new year – and a new administration – might mean for their investments. Investment Strategist Kate Warne discusses the following:

  • The impact of the election – Proposed changes in government policies dominate the outlook for 2017. Stock prices, interest rates and the value of the U.S. dollar have all risen since the election due to optimism about expected pro-growth policies, and we think economic growth will improve. But keep in mind that most policy changes don’t happen overnight. The impact depends on the details – and the policy priorities aren’t clear, which is why there’s more uncertainty. Even though some changes could happen quickly, Edward Jones doesn't expect to see the earliest effects until the second half of the year.
  • The long-running bull market in stocks – The fundamentals of economic and earnings growth remain positive, supporting rising stock prices over time. But higher policy uncertainty means more market volatility is likely as well. Warne says the brighter economic outlook should mean continued job growth as well as increased consumer spending, which has been the backbone of this bull market. While diversification cannot guarantee a profit or protect against loss, you can prepare by adding more types of investments to build a solid foundation for your portfolio and help it weather the impacts of changing policies.
  • Rising interest rates – Edward Jones thinks they’ll rise modestly, but remember that almost all predictions about interest rates are wrong. The Federal Reserve has signaled it intends to keep raising short-term rates if economic growth continues at a solid pace with further improvements in the job market. Edward Jones believes the Fed will remain patient and move slowly as long as inflation doesn’t jump sharply. Long-term interest rates have already increased, and may rise further, due to expectations of additional Fed rate increases, faster economic growth, higher inflation and rising federal deficits in 2017. And inflation is edging higher to around 2% as wages increase, but falling prices from the rest of the world should still keep it subdued. When interest rates rise, long-term bond prices have typically dropped more than short-term bond prices, and that’s why Edward Jones suggests a small allocation to long-term bonds. But don’t ignore bonds in your portfolio, since their prices frequently rise when stocks drop, helping stabilize portfolio values.
  • Risks and opportunities internationally – International risks remain high, and the increase in the value of the U.S. dollar at the end of 2016 reduced international returns. Despite that setback, Edward Jones sees international stocks as an opportunity for long-term investors, and they help diversify your portfolio. Adding them to U.S. stocks and bonds has increased the chances of positive returns over time.* While U.S. stocks are near record highs, international stocks have lagged and are attractively valued in Warne's view, with an improving outlook. Better U.S. growth could help boost foreign growth as well, working with higher government spending and expansionary monetary policies in Europe and Japan.

Action for investors

  • Position your investments to benefit from improving economic growth combined with higher market volatility as policies change.
  • Review your mix of stocks, bonds and international investments, and rebalance if needed to the appropriate percentages based on your comfort with market volatility and long-term financial goals.
  • Consider adding small-cap and mid-cap stocks that may benefit from pro-growth policies, as well as international developed-market stocks.
  • Stay patient and disciplined. Don’t base your portfolio on hopes or fears. Instead, rely on time-tested principles, stay diversified, and expand the types of investments you own to help you weather policy uncertainty.

Important Information:

*Source: Morningstar Direct, 11/30/2016. U.S. stocks represented by the S&P 500 Index. International stocks represented by the MSCI EAFE Index. Indexes are unmanaged and are not available for direct investment. Past performance is not a guarantee of what will happen in the future.

Before 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.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Small- and mid-cap stocks tend to be more volatile than large company stocks.

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