Wise investors expect the unexpected.
While analysts warn investors about uncertainty every year, the wisdom holds especially true in 2017, says Russ Kinnel, director of manager research at Chicago-based Morningstar.
“We happen to be at or near the end of a number of long-term political and economic cycles,” Kinnel says. “We’re entering a period of 'the new normal' where there’s greater uncertainty and perhaps higher risk than in years past.”
In his recent report, “Where to Invest in 2017 and Beyond,” Kinnel argues that investors should diversify to mitigate the various risks of the year to come.
Reason No. 1 to be wary, according to Kinnel, is the length of the bull market in equities.
“(Barack) Obama came into office with the economy in a freefall, and since then the economy and the markets have started to rebound pretty strongly,” Kinnel says. “We were in a period of low inflation and slow growth, but now all of those things are changing.”
Kinnel notes that most analysts were already calling the bull market “old” at the beginning of 2016.
Kinnel also argues that inflation may be on the rise, and that in response, the Federal Reserve may act to raise rates several times in 2017. If those expectations come true, they could have a deleterious effect on bonds and other forms of fixed income.
“After people have overestimated inflation for eight years, there might just be an upside surprise in inflation, particularly in oil with so much capacity taken out over the past few years,” Kinnel says.
Rising inflation and interest rates could dampen dividend-paying equities, says Kinnel. While dividend funds have soared in recent months as investors sought solid sources of income, the strategies may lose some of their luster as bond yields increase.
At the same time, Kinnel says that many analysts expect equity returns in general to revert to lower levels in the coming months and to remain depressed for an extended period of time.