Market Commentary

Weekly commentary on recent stock market action, with a particular focus on technical analysis.

October 19, 2016

Scott Wren, Senior Global Equity Strategist


  • After a multi-year period of attractive returns, the stock market in 2017 looks to be flat based on our analysis. We believe the high in 2017 will likely come near mid-year.

What it may mean for investors

  • Investors will need to pay more attention to the stock market next year. They will need to be on their toes and watch for opportunities to adjust equity exposures.

For most of the last seven years, investors could have pretty much put their domestic equity exposure on cruise control. In virtually every calendar year during this recovery, our work suggested the market would assign a higher valuation (in terms of price-to-earnings, or P/E, ratio) to the S&P 500 at the end of the year than it did at the beginning. It may have taken quite a while, but at least based on our work, the large-cap S&P 500 is finally close to or just a bit below what we would consider “fair value” for this point in time. And we continue to believe the index will likely close higher at the end of this year than its level at the time of this writing.

However, calendar year 2017 is stacking up to be different than the previous handful of years. Based on our analysis, and as we have indicated in recently published reports, we think there is a good chance the S&P 500 will see its high for the year sometime in the middle portion of 2017. We look for the P/E ratio to be lower at the end of next year than the beginning. The bottom line for us is when it is all over and done with, we think 2017 will be a rather flat year in the stock market. We think there will likely be opportunities to make adjustments to our recommended sector weightings. If the stock market tails off during the second half of 2017 as we expect there may be an opportunity to raise the level of cash that we suggest investors hold. Our strategy will become clearer as we get into the early portion of 2017.

So, as an Equity Strategy team, we will need to be on our toes next year. We have had a long period in which stocks have made a robust move to the upside. Recall that in March of 2009, at the depths of the equity bear market, the S&P 500 traded down to 667. If you look at that index today, it is trading near 2140. That represents a big move over the course of the last 7 ½ years. Volatility has mostly been lower over that time frame relative to other past recovery periods. Just looking back at this year, we have had two meaningful moves to the downside, but they were brief (or very brief). In the first six weeks of 2016, stocks took a dive as fears over a collapse in China’s growth rate gripped the global equity markets. Then in June, in the wake of Great Britain’s decision to eventually leave the European Union (“Brexit”), stocks took a big hit but regained all their losses and then some in the course of just a few trading days. This year feels like it has been very volatile to many investors, but the statistics show otherwise.

We have not seen any signs of “irrational exuberance” from market participants in this recovery. But in this strategist’s opinion, it might be wise for investors to pay a little more attention to the stock market in 2017. Equity agility may be critical to performance in the New Year.

Risk Factors

All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

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