Still Waiting For A Correction? Market Outlook For 2017

Dec. 19, 2016 2:44 PM ETSPY, QQQ, DVY, DIA, IVE, VTI, XLE, IBB, SH, XLF, IWM, VIG, FAS, AMLP, XLV, XLK, TZA, VYM, SSO, TNA, VOO, FAZ, IYH, XLU, SDS, SDY23 Comments

Summary

  • Investors have been relatively cautious in the second half, with money managers and opinion leaders predicting an imminent correction.
  • All key constructs of stock market valuation have continued to be supportive of higher valuations.
  • Markets in 2017 have a lot going for them but eventually, it will come down to policies and legislation that can spur further growth.
  • We anticipate first half of 2017 will be better than the second half, and major indexes to record double-digit gains.

Stock Market - Graycell Advisors

Are we still waiting for the correction? The year is almost up!

The second half witnessed many prognostications from luminaries about an imminent major correction, while months have continued to pass and the markets have recorded all-time highs. The prognosticators may well be right, but not in 2016!

Fortunately, the year 2016 has been a better year to make money in stocks compared to 2015.

As of December 1, the small caps had the best performance amongst major indexes, with the Russell 2000 (IWM) index up +16%, strongly overcoming the negative -6% performance in the prior year. The S&P 500 (SPY) was up +8%, compared to a decline of -1% in 2015, while the Nasdaq (QQQ) was up +6%, closely tracking the 2015 performance.

At the beginning of January 2016, we had published our Market Outlook 2016 and noted that:

We believe the decline and consolidation process to continue till February (2016), while March and April being the months when the market begins to consolidate and move higher...we believe a low-interest rate environment, a moderately growing economy, and rising payroll/consumer spending will deliver single-digit positive returns for both large-cap and small-cap indexes."

Thus far, we are fairly close to the mark, with only the Russell 2000 performing better than expected for 2016.

Following the above template, and after being in cash for the first quarter of 2016, we have maintained the course with stocks and that has worked out well. As of December 1, the Graycell Small Cap Portfolio was up over +70%, and the Prudent Biotech Portfolio was up over 7%, compared to the benchmark Biotech ETF (IBB) decline of -19%.

Financial markets are not easy to interpret and often defy logic. But what has been clear are the three key pillars of the stock market - Earnings, Economy and the Monetary Policy - have

This article was written by

Tarun Chandra, CFA profile picture
4.68K Followers
A healthcare growth portfolio with a record of consistently strong returns

I have worked as an Analyst on both the Buy (Asset Management) and Sell (Investment Brokerage) sides, as well as in Strategy and Finance roles for technology services companies. For many years, I have been publishing risk-adjusted, return-driven quantitative model portfolios.


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