From a new administration in Washington proposing health care and tax legislation to escalating tensions abroad and hurricanes at home, 2017 has certainly been a dramatic year. While the 24-hour news cycle could have caused individual investors to panic or overreact, the markets themselves have remained comparatively steady. So, what gives?


Why do you think the markets remained strong despite a volatile year?
The most important factor was a rebound in corporate earnings growth, which positively impacted stock holdings in many portfolios. Last year, earnings were declining, but they began to turn around later in 2016. Related to that, both the U.S. and the global economy have been growing and accelerating.

What kind of return rates should investors anticipate in the coming year?
While economic fundamentals remain solid and earnings are expected to continue to grow, stock valuations are stretched by historical standards, especially in the U.S. Overall, we anticipate that returns in global stock markets will be positive in 2018 but likely more modest than this year. Returns in fixed-income markets are also likely to be slim, as we expect interest rates to rise. Taken together, a balanced portfolio may see moderately positive returns.

Should inflation be a concern for retirees or those about to retire?
Inflation has remained surprisingly subdued. A longstanding economic theory called the “Phillips curve” says that there’s an inverse relationship between employment and inflation. In other words, as unemployment drops, inflation should start to rise. So far, it hasn’t — confounding economists. Our analysts at Baytree Capital, along with most central banks including the Federal Reserve, do expect inflation to rise at some point. There shouldn’t be a portfolio impact in the near term, but those in or close to retirement may want to work with their advisor to prepare for the possibility of higher inflation.

Will the presidential election have a longer-term effect on the markets?
Leading up to the election, the market was strong and continues to be strong post-election. Initially, there was the anticipation of tax reform, health care legislation and infrastructure spending — so the immediate market reaction was based on those expectations. Some of the longer-term implications are yet to be seen.

How do I prepare for tax reform?
It may behoove individual investors to be prepared to respond quickly if there are changes to tax brackets, mortgage interest deductions or estate taxes. You may even want to work with your advisor to revisit tax allocation among your investments. In short, stay tuned for alerts and updates.

How did the failure of the Affordable Care Act (ACA) repeal impact health care on the investing level?
Because the ACA compelled people to have medical coverage, it was generally a positive for insurance and hospital stocks. And if you look at biotech or pharma stocks, there’s been a lot of innovation in that area, and they’ve been strong market performers. Even with all the uncertainties in the health care sector, we remain positive about its performance outlook.

What about the upcoming 2018 midterm elections and potential market impact?
Whatever does not get done on the policy front before Congress turns its attention to the mid-term elections will stall. If there is a change of control in Congress, that could mean that very little gets done in 2018.

Should investors be concerned about geopolitical strife?
Escalating tensions around the world do have people concerned, but it’s difficult to prepare for all the unknowns around those situations, other than working with your advisor to ensure you’re well-diversified to buffer against volatility. More cautious investors may want to protect some assets in the form of bonds, gold or alternative investment.

A private wealth advisor can help you learn more.