2017 Market Outlook

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Last year was a wild year for markets to say the least, with a severe January correction, a Brexit surprise and Donald Trump’s unexpected victory. Yet stocks finished the year strong, with most developed and developing markets seeing good gains, especially Canada and the U.S. What exactly drove the markets? And what might happen in 2017?

Politics: The surprising populist surge

The most memorable events of 2016 were political ones. Brexit sent shock waves through global equities and pushed global bond yields to all-time lows. Better-trending economic data, however, ensured the equity sell-off was short-lived. Even quicker was the market recovery following Donald Trump’s surprise win in the U.S. presidential election. The Dow’s 8% gain in the five weeks after Trump’s victory is the biggest surge following any U.S. presidential election in history.

What do investors need to watch out for in 2017? In this video, Jeff Singer, Investors Group’s Executive Vice-President & Chief Investment Officer, explains.

It was Canada’s year to shine, finishing 2016 as the best-performing developed market in the world. That’s a reversal from 2015, when it was one of the worst. The change was thanks to the recovery in oil prices. With resource stocks representing a third of our market, it’s no surprise that the S&P/TSX handily outperformed the S&P 500. This occurred even as Canada’s economy scratched along at roughly 1% GDP growth.

America: Record-breaking gains

It was another strong year for American markets, with the Dow Jones Industrial Average nearly breaking 20,000 for the first time in history, and the S&P 500 surpassing its previous highs. Investors who added to U.S. equities in February when the Dow dipped as low as 15,660 were rewarded with a gain of close to 30% by year end.

Will Canada experience another nearly 20% return in 2017? Will America forge ahead in a Donald Trump presidency? Singer thinks it’s unlikely Canada will do as well this year, but as he explains in this video, North American markets could still see solid gains.

Crude and the loonie often move in tandem, but that began to break down in the second half of 2016. As crude plunged in January the loonie dropped below 69 cents US. Both then reversed and climbed until May, when the Canadian dollar began to drift from a high of 80 cents U.S. back down to 74 cents by year end. Oil rose by $10 in the same period, boosted by November’s OPEC agreement to cut production. Why the divergence? In part, because interest rates are rising faster in the U.S. than here. An improving oil outlook could mitigate the impact on the loonie.

In this video, Singer looks at how oil prices could keep rising and explains why rising crude may not make our loonie stronger.

Three decades ago, the yield on U.S. 10-year treasuries was over 15% – in 2016 it hit a low of 1.3%. That’s meant average compounded bond price appreciation of more than 10% per year. With low rates now starting to climb to a more normal level, the total returns available from bonds has shrunk to near zero. Higher rates have caused bonds to sell off worldwide, and have also negatively impacted prices of so-called “bond proxies” like utilities and real estate investment trusts (REITs). However, they have helped bank and insurance stocks, which have soared since rates turned back up.

Rates could continue to rise in 2017. What does that mean for the fixed income part of your portfolio? Singer explains.

Coming into 2016, corporate profits in both Canada and the U.S. had been stagnant or declining for several quarters. This is problematic, as equity returns are ultimately driven by earnings growth. Fortunately, the S&P 500 posted year-over-year growth again in the third quarter of 2016 after five consecutive year-over-year down quarters. In Canada, corporate profits fell for eight straight quarters through Q3. However, what’s often missed is that the absolute level of earnings had settled earlier, with data showing U.S. corporate earnings bottoming out in Q1. Improving earnings performance helped revive the economic outlook, while expectations around Trump’s seemingly pro-growth policies have heightened expectations of continued profit growth.

Your Investments: Stay the course

If this year has taught investors anything, it’s the importance of sticking to the plan. There were several times where investor patience was tested – in January and after Brexit, for instance – but after every decline the market rebounded. With continued concerns around global GDP growth and world politics, markets could remain volatile in 2017. But, as we learned in 2016, when the corrections do come, don’t panic, and, if anything, a market dip may offer investors an opportunity to buy. It’s impossible to perfectly time markets, so even if you sell before a bottom, you’ll likely miss getting in before the upswing. In other words, stay the course in good times and bad.

In this video, Singer talks more about the year ahead and explains how Canadians should deal with market volatility.

This report specifically written and published by Investors Group is presented as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide legal or tax advice. Clients should discuss their situation with their Consultant for advice based on their specific circumstances.

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