Stocks sprinted to new highs in 2017 without their usual accompanying volatility, helping investors remain cool and unfazed despite elevated economic policy uncertainty, political acrimony, rising short-term interest rates and still-slow economic growth. Although U.S. stock market valuations are above-average, we think stocks can keep rising based on modest U.S. economic growth and rising earnings, as well as accelerating global growth. However, the calm environment may not continue, and future returns may not live up to elevated expectations.
Smart investors have stayed invested despite worries that could trigger higher volatility over time, including:
Rising geopolitical risks – Conflicts could worsen as foreign leaders jostle for power and try to gain advantage from changing U.S. policies. Accelerating economic growth in the rest of the world helps improve prospects domestically, adding to the power of increasingly optimistic consumers. Our outlook for U.S. economic growth and markets is positive but realistic, as challenges lie ahead.
The past year’s above-average U.S. stock returns may not continue. As the chart shows, high consumer confidence was followed by low stock market returns over the following year – the Dow was up only 0.6% on average.1
Stocks have been said to climb a wall of worry, and that seems to be true since the most recent market correction in early 2016. As they climb that wall, stocks usually drop by 10% or more about once a year, with three or four smaller pullbacks of 5%. But in the more than 18 months without a single 5% pullback, some investors may have forgotten how volatile stocks can be.
What can you do to position your portfolio for the possibility of lower returns with more volatility? We recommend five moves:
A realistic and proactive approach with a well-positioned portfolio can help you keep calm and stay invested over time. Contact your financial advisor today to help ensure your portfolio is properly positioned for whatever lies ahead.
1 Past performance is not a guarantee of how the market will perform in the future.
2 Source: Morningstar Direct. Investment-grade bonds represented by the Barclays U.S. Aggregate Bond Index. Stocks represented by the S&P 500 Index.
Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events. 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.
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