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March 14, 2017
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Wealth Management Outlook | A Busy Year with High Expectations

Policy and rising confidence mean GDP growth, but will that push a historic market higher?

By LaneReport.com Staff

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Kentucky financial advisors foresee a boom year for their services. While a historic bull market’s run to all-time highs looks ripe for a correction, many business and public policy indications suggest growth could well continue for at least a couple of years. GDP growth and corporate profits are expected to improve, supported by tax cuts and government spending on infrastructure and military contractors as well as an increasingly confident private sector. 2017 is shaping up to be a busy year with baseline interest rate increases by the Federal Reserve and a wait-and-see game on what business-policy changes finally emerge in Washington and in Frankfort. Those with wealth to manage face an ongoing series of strategic decisions regarding how best to balance their positions while responding to change.

“Optimism that a pro-growth agenda will boost economic activity is also producing record highs for stock prices. Given that equity valuations are stretched, the market remains vulnerable to a pullback if the economy and corporate earnings fail to deliver. As always, investors need to stay focused on the long term and be prepared for a potentially bumpy ride. Stock market weakness should be viewed as a buying opportunity. Regarding bonds, short-term interest rates are likely to continue to edge higher and contribute to a flattening Treasury yield curve. Bond market volatility may also increase as the market digests all that is unfolding. Income investors should focus on short-to-intermediate issues that limit the impact of higher rates and bond price volatility.” — James R. Allen, Chairman & CEO, Hilliard Lyons

“Recent economic trends, the possibility of corporate tax reform, a more favorable regulatory environment and increased infrastructure spending all are supportive of a better U.S. business and equity market environment in 2017. While the U.S. market clearly is not as attractively valued as a few years ago, with the P/E ratio slightly higher than the historic average we believe a strong case can be made that the market is not overvalued given the improving corporate earnings outlook and low inflation expectations. We would be less constructive on the U.S. equity market if economic growth showed signs of slowing or inflation expectations moved materially higher. Historically, the P/E multiple of the market is not unduly pressured until inflation approaches 4 percent.” — Lou Lemos, Chief Investment Officer, First Kentucky Trust

“The economic and political tug of war will continue throughout 2017, having broad long-term effects on the economy. Front and center is tax reform, infrastructure spending, easing regulatory burdens and trade policy changes for 2017. By year’s end expect slightly higher interest rates, an overheated labor market and increased costs for goods and services, thus higher inflation. Many believe we were overdue a stock market correction even before the Trump run-up following the election. Predictable are further increases in the market with the possible convergence of historic tax cuts, government economic stimulus and increased military spending. Finally, look for continued overall favorable interest rates with improved availability of money resulting from decreased banking regulations.” — Ernest Sampson, CEO, Private Client Services

“Economic growth and corporate profits are expected to accelerate this year, and real tax reform will provide an additional boost if Congress can get it done in 2017. Tighter monetary policy and slightly higher core inflation will both serve as minor headwinds for financial markets, but shouldn’t be a significant impediment to the economy. Stretched equity valuations leave limited upside for stocks, while bond returns will be restrained in a rising interest-rate environment. Risks to economic growth could include trade wars and additional defections from the European Union.” — Chad Sturgill, Senior Portfolio Manager, Unified Trust Co.

“We are calling 2017 the year of high expectations. The market appears to be discounting a significant amount of the pro-growth policies that the new administration has promised. We remain confident that an overweight position in equities is appropriate and see high mid-single-digit returns for the year. We continue to prefer financials as we see them as the primary beneficiaries of rate hikes and stronger GDP growth. However, we do not believe the Fed will implement all three rate hikes in 2017 because of the high level of global debt and its impact on the administration’s ability to provide fiscal stimulus. We continue to favor municipal bonds since municipalities benefit from a stronger housing market and healthy economy.” — Andy Waters, President/CEO, Community Trust and Investment Company

“Over the next 12 to 18 months, many believe the U.S. economy will push higher and take equity markets with it. Since the recession, I’ve seen individuals, banks and corporations increase their balance sheets and carefully steer clear of issues. Small businesses are hiring and wages have increased, driving consumer spending. Although an interest-rate increase by the Federal Reserve could cause an equity market hiccup, our clients know the importance of diversification and having a solid written financial plan that grows and protects wealth from turmoil.” — Brandon Gaines, Wealth Management Advisor, Northwestern Mutual

“Global economic growth bottomed the first half of 2016 and began a cyclical upswing that should last several years in emerging markets and at least through 2018 for the U.S. The positive effects of lower oil prices and the strong dollar for U.S. consumers are lifting household spending back to its 3 percent real growth trend. Expect U.S. real GDP growth of 2-3 percent next year with inflation continuing to move slightly higher. Higher nominal growth and the possibility of lower corporate tax rates add to the upside potential for profits. While policy remains the wildcard, we expect consumer and investor confidence to continue rising. We believe wealth management is entering a bull market for advice like nothing we have seen in history.” — Travis K. Musgrave, Managing Director – Wealth Management, Merrill Lynch Lexington

“Fiscal and monetary policies will be driving forces for financial markets. A more transparent Federal Reserve has telegraphed its intention to raise interest rates three times during 2017, while the new administration shows a mercurial willingness to add or remove regulations. While investors should maintain a long-term view, the short-term outlook certainly presents some risks to portfolios, particularly with equity markets at historically high valuations. Given the Fed’s posture, we expect under performance in the fixed-income markets, which traditionally are havens for risk-averse investors. With current valuations, we could see a correction – at least a 10 percent drop – in equity markets. To mitigate risks, a thoughtful tilt toward defensive equities may offer the best prescription for weathering the uncertainties likely during 2017.” — Tim Yessin, Vice President, WealthSouth

“The wealth management outlook could not be brighter. Dow Jones Industrials have climbed from 6,443 in 2009 to 21,115 on February 28, 2017. To ride the wave of tumultuous times surely ahead will require a steady hand. Tried and true methods to balance portfolios should be employed: dividend-paying stocks, quality bonds and a cushion of cash for emergency buying. Billions have flowed into unmanaged index funds, and those investors may be sorely disappointed in future growth. Once the multitude moves to the latest investment trend, historically, you can be assured they are already “late to the party.” It may be beneficial for people in the unmanaged funds to have a conversation with those offering a steady hand and a proven path.”  — Rod Brotherton, Vice President, Wealth Advisor, Kentucky Bank 

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