The Outlook for 2017

And what you should know about it

For investors, the beginning of a new year is a great time to take stock and see what the next twelve months may hold. What do I need to know about the markets? What should I consider doing about it?

While 2017 may bring more than its fair share of uncertainty, the BlackRock Investment Institute has identified three key themes that may drive developments in the year to come.

Reflation

What to Know: Improving growth and the prospect of U.S. fiscal expansion are fueling inflation expectations. Interest rates globally are likely to start moving up, which can cause pain for holders of long-duration bonds as yields rise.

On the equity side, rising global inflation is contributing to a big sector rotation: laggards like financials have recently soared, while previously favored low-volatility sectors such as utilities, telecom, and REITs may continue to suffer.

What to Consider: Sectors tied to economic expansion may continue to climb out of years of underperformance – financials (IYG) and regional banks (IAT), healthcare (IYH), basic materials (IYM). Dividend growers – companies with the potential to sustainably increase dividends over time – may also be worth considering (DGRO).

In fixed income, steepening yield curves suggest investors should consider shorter-maturity bonds and inflation-linked instruments (TIP, STIP, SHYG, CSJ).

Low returns ahead

What to Know: Economic boom times look unlikely to return. The global economy’s potential for growth isn’t as strong as it has been, due to aging populations, weak productivity growth, and excess savings. Returns may be lower, and the opportunities may be fewer and farther between.

What to Consider: Investors may have to look further afield for income and gains – large-cap U.S. equities look unlikely to continue to deliver. Those willing to take on more risk and explore a more diversified approach may find their intrepidness fairly rewarded outside the U.S. (EFAV, EEMV, INDA, EIDO, HEWJ, EMB).

Dispersion

What to Know: Long-held relationships across asset classes appear to be breaking down, so investors may need to take an extra look at the true diversification of their portfolios. The negative relationship between stocks and bonds has notably weakened, and some assets that have historically moved in tandem (like oil and large-cap domestic equities) have not done so recently.

What to Consider: We see a greater role for equities, alternatives, and shorter maturity bonds to help manage risk in portfolios (NEAR, FLOT).

When making big purchases, most of us are sensitive to price. An investor’s portfolio is, in a sense, often one of their biggest purchases, but many investors are more focused on returns than on examining their costs. And in a low-return environment, costs can play an especially crucial role in optimizing your portfolio’s performance.

While the market made some impressive gains earlier in the decade, many experts believe that times have likely changed, and those kinds of returns may not be attainable in the next few years. In a landscape where impressive returns may be few and far between, investors should consider taking a hard look at the costs of their investments.

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