2016 was a rollercoaster year for the stock market, but investors who held their nerve when markets dipped mid-year were well rewarded. The Dow Jones rose from 17,148 at the start of the year to over 19.949 by the mid December. Will 2017 be as profitable?

Some analysts think it will. They point to Trumponomics – reflationary and expansionary policies that should help the US economy grow faster than was previously forecast – and expect to see good earnings from US corporates in 2017.


The economic climate has definitely changed. The Fed’s decision to put rates up at the end of 2016 marks the end of years of quantitative easing. Inflation is back, though still relatively contained, and while this is probably bad news for bonds, equities might do better in a faster growth environment.


The fly in the ointment is the historically high valuation of the US stock market. Goldman Sachs points to high price/earnings ratios for US shares, and says returns to investors could be constrained. Most analysts expect positive, but low, returns to investors; stock picking and asset allocation will be more critical to returns this year than last.


2017 could be a good year for commodities, which appear to have troughed in 2016. Production capacity has been cut back in many metals markets while there has been little new capacity coming onstream in oil and gas, and many marginal shale oil producers have ceased business. Even a fairly low growth in demand could send prices skywards given constrained supply.


Financials could also be a stand-out sector, with resurgent interest rates allowing them to expand their lending margins. Stock-picking will definitely be critical in this sector, though, as some banks have flimsy balance sheets, while others – particularly ‘challenger banks’ in some countries – have both strong asset positions and the opportunity for major growth.


On the other hand commercial real estate, which is generally valued on a yield basis, could see capital values fall as interest rates move upwards. Other ‘safe’ income-generating investments like utility companies, which tend to act as bond proxies, could also be hit by a bond devaluation, so investors need to check their portfolios – last year’s safe bet could be this year’s disaster in waiting.


Looking at global market, China continues to divide opinion. So far, the government has managed to avoid a hard landing by reshaping the economy to depend more on consumer demand and less on exports and construction. While debt remains high, the situation appears manageable. That should allow emerging markets to make a good showing in terms of earnings. Resurgent commodity prices could also help commodity exporters like Russia and Brazil, both of which are beginning to recover. However, with the dollar riding high, returns from emerging markets could be negatively affected by currency rates.


According to the prevailing view, then, markets will continue to deliver a positive return for investors – though you (or your fund managers) will have to work harder to boost returns above the merely pedestrian.


However, there are a few dissenting voices out there. Investment guru Jim Rogers has forecast a major crash, and there are a few economists who agree with him. Increasing protectionism, they believe, could depress global trade, and higher oil and gas prices could put an end to earnings growth for manufacturers and services companies which have high input costs in energy or petrochemicals feedstocks. While a cheap stock market could shrug off a less than thriving economy, high valuations make it likely that any disappointment on GDP growth or quarterly earnings would be severely punished.


Is a crash likely? Probably not. But there’s a lot of political uncertainty out there, with elections in France and Germany, as well as the prospect of changes under President Trump, and continuing Brexit negotiations. Investors need to be fleet of foot and have access to good information such as that provided by trading site CMC Markets.


Whatever actually happens in 2017, it’s certain that markets will continue to be volatile and that above-average investment returns will be difficult to achieve. Investors need to keep a close eye not just on the stock markets, but on economic news and currency rates.