I want to share with you (below) our 2017 stock market Annual Update and Outlook from our Financial Services Division,
"Sullivan Wealth Management", here at
Sullivan & Company CPAs. In case you didn't know, I am an IAR or
Independent Advisor Representative and the RIA or Registered
Investment Advisor we work through is the Archer Investment
Corporation, who generated the Mid-Year Update and Outlook for
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greedy advisors. Some forward thinking CPAs worked hard to get the
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At the start of 2016 we anticipated the market to move higher by 5-7%. We
looked pretty accurate until the election turned in results that many were
not expecting. The water under the bridge kept moving so let's do the
same. Typically from November through April of an election year we see an
average 10.3% return in the market since 1926. From November 2016 through
this writing on January 4, 2017, we have seen returns of approximately
7.5% in the S&P 500! Whether this takes some steam out of 2017 total
return or not is yet to be determined. We will examine why the market
should move higher and what role interest rates will play in 2017. Most
importantly what will earnings report in 2017? Will earnings break out of
this 2015-16 Rip Van Winkle nap?
If you recall in October, confidence in the stock market was waning even
with unemployment at anemic levels. We heard doom and gloom consistently
out of the talking heads on TV. Now with the election behind most of us,
we can focus on earnings growth in the US. Yes, with this President, we
are going to see constant headline risk (or Twitter risk), but with this
comes some relief in regulation for the financial industry. Any bull
market needs financials to perform well if it is to be long-lived. In this
case higher rates and less regulation may propel financials higher.
The previous table shows how weak earnings were in 2016. Much of this was
attributable to energy as shown in the table below. For 2017, we see
Energy returning some of its earnings growth which could propel overall
earnings much higher in 2017. In fact, the current estimates are for some
double digit earnings growth for the S&P 500 in the latter half of 2017.
However, one statistic we just can not ignore is the prognostication
coming from the elite on Wall Street. We know how accurate they are every
year! (Hear my sarcasm). For 2017, the experts are predicting a 5% return
on the S&P 500. Now that number may not seem too far-fetched. However, for
the last 17 years these same experts have predicted 9.6% returns on
average and the end result was only a 4.2% return. This is not even close.
They have been overly exuberant about returns.
The reason I mention this exuberance about returns: 2017 will represent
the smallest gap between the most optimistic estimates and least actual
results since 1999. We all know how 1999 ended. I think these estimates
tell us there is going to be much more volatility in the stock market in
2017-18. There will be some bumpy rides as everyone jumps and climbs with
every headline or tweet.
We can see in the next graph the volatility we experienced in 2015 and
2016. I don't like looking in the rearview mirror, but it is important to
note that 5% moves up or down in the market are to be expected in 2017 and
Let's move on to interest rates. We have seen the yield on the 10 year
Treasury Note move up 100 bps to over 2.5% since the election. Many are
speculating a move upward in interest rates would ruin any chance of the
stock market moving higher. Not so fast. Stocks and interest rates can
sometimes go up together as they did in the mid 50's up to 1970. The one
thing we don't want to see is interest rates move too high too fast. We
expect the Fed to move rates higher at least twice in 2017 and probably
three times. This will be a positive for financial institutions and
property and casualty insurers. Likewise, deregulation could boost profits
for financial firms and many other companies. The table below shows 12
episodes of bond yields rising and the stock market rising as well. Often
times, interest rates are moving higher because the economy is doing well;
as is the case this time. The US Manufacturing PMI for December came in at
54.7% which says the economy is doing better than OK. With numbers
strongly above 50, we see little chance of an economic downturn in the
first half of 2017.
With PMI here at home approaching the mid
50's and world PMI above 50 now we could start to see inflation creep in
and move above the average Consumer Price Index (CPI). We will look at the
last 46 years and half of the years are lower than the median and half are
higher. The average annual returns were positive except for commodities in
low inflation years (the lower 23 years). In higher inflation years
commodities increased 22% annually vs. -1.9% in low inflation years. So we
might expect higher oil prices and gas prices for 2017 if we assume
CPI/Inflation are higher than normal. We expect oil to hover around $62
per barrel in 2017. This level will not be enough to derail the economy,
but enough to return profitability to the energy sector which should be
another positive for the stock market in 2017.
As we keep discussing sectors such as financials or energy, we think it
makes sense to look at how sectors perform annually in different years of
an election cycle. We all know Health Care struggled in 2016 and was
essentially flat for 2015 and 2016 combined as Washington took their pound
of flesh from the industry by claiming they were the cause of high
insurance and health care costs. Folks, we are aging as a society and we
all want to live longer with new drugs. This costs money! I do think
making insurance companies compete across state lines will also drive down
costs. This may be a possibility if the new administration finds a way to
adjust the Affordable Care Act and make it more Affordable.
We continue to see opportunities for stocks in lieu of bonds in the next
year. As we are in Election Year +1, we see good opportunities for the
stock market. If earnings hold up as expected this year, the market could
move 9-12% higher in 2017. Although we have discussed bonds moving lower
(rates higher) it is possible with all the World's Central Banks, interest
rates may be range bound as liquidity is extremely high. In addition,
money supply in the US and around the world continues to grow even in the
face of Federal Reserve Banks around the world raising rates.
The Archer Team
Troy C. Patton, CPA/ABV
Steven C. Demas
John W. Rosebrough, CFA
The opinions contained herein are not intended to be investment advice or
a solicitation to buy or sell any securities. Archer Investment
Corporation manages The Archer Funds. You should carefully consider the
investment objectives, potential risks, management fees, and charges and
expenses of the Fund before investing. The Fundís prospectus contains this
and other information about the Fund, and should be read carefully before
investing. You may obtain a current copy of the Fundís prospectus by
calling 800-800-1776 or visit
www.thearcherfunds.com. Past performance is
not a guarantee of future results. The investment return and principle
value of an investment in the Fund will fluctuate so that an investorís
shares, when redeemed, may be worth more or less than their original cost.
Distributed by Arbor Court Capital, LLC, 2000 Auburn Drive, Suite 300,
Beachwood, OH 44122 Member FINRA.
Services at Sullivan & Co. CPAs
Sullivan leads our Financial Services Division and is here to
help you navigate your financial future. As an Investment
Advisor Representative, he is able to provide an
independent opinion on the investments you already own or
are considering buying.
We can structure a portfolio
based on your risk tolerance or we can help you decide how
to invest in your company 401(k) plan. We work with each
client to identify their concerns and to provide solutions
according to their situation.
is also experienced in company retirement plans. If you own
a business that does not have a plan; we can discuss your
options and set up a plan that fits your company.
If your business already has a
plan; we offer a free evaluation of the plan to ensure that
it is up to date and working well for you and your
Our goal is to provide personal, unbiased and independent
advice to help you make well-informed decisions about your
financial life and investments.
Contact Paul Sullivan or Chris Bailey to set up a free initial
consultation (301) 657-8080.
And as always if you have any questions about accounting or
investments and how they effect you or your business, please give
us a call. We
can help guide you in the right direction.
Remember you can call our offices if you have any
questions about these or any other accounting, tax,
financial planning or insurance related issues, at
Regards, Paul Sullivan, CPA
President, Sullivan & Company