2017: A Challenging Year Ahead for Portfolio Allocation Decisions

Surprising many investors and pundits alike, the S&P 500 posted a solid return for 2016, finishing the year up close to 10%. If investors never looked at their statements, one might be naïve to how much markets zigged and zagged throughout the year.

To mention a few:

  • The S&P 500 was down -12% to start the year—the worst ever start to a calendar year—driven by tremors in Chinese equities and currency along with plummeting oil prices.
  • The stock market also bounced back from the surprise of the Brexit vote and the uncertainty of the US election cycle, indicating a durable bull market.
  • The benchmark US equity index completed its eighth consecutive positive year in the post-crisis environment. Incredibly, the S&P 500 has now delivered annualized returns of over 14% over this eight year period.
  • Meanwhile, investors in many “alternative” investment strategies, such as hedge funds, suffered through mediocre relative performance exacerbated by high fees and negative press.

Can We Expect More of the Same in 2017?

At Altegris, we focus on selecting alternative and diversifying strategies that help advisors and investors create resilient portfolios. And we think that 2017 will be a year when portfolios need to be more resilient than ever. At the time of this writing, the inauguration of our 45th President is behind us and the so-called “Trump Rally” has taken a pause, awaiting some definitive delivery of many campaign promises.

Predicting market direction and outcomes is notoriously difficult, if not impossible. Altegris agrees with Harry Markowitz’s idea that diversification is indeed the one free lunch available to investors. As investors, we should never bet the farm on a single forecast or one expected outcome. But, however, we should form a base case economic and market view to help us make informed reallocation decisions that we believe will add value to our portfolios.

At the Core of the Altegris Base Case for 2017: The Beginning of a Transition from Monetary to Fiscal Policy Dominance

We believe that the impact of fiscal expansion along with tax and regulatory relief will create a genuine tailwind for the US economy and the slow grinding recovery may finally reach takeoff velocity. This is bullish for domestic equity valuations. The spread of populist movements will be the catalyst for increased fiscal spending in Europe as the electorates increasingly reject austerity. Politicians challenged by upcoming votes in France, Germany and the Netherlands will likely respond or face defeat. The evidence provided by the Italian banking crisis is that EU rules can be bent when necessary. Meanwhile, pressure is increasing in Japan to finally defeat deflation with a new round of fiscal stimulus. Taken together, we expect this fiscal tide change to be supportive of global growth. Stock markets in Europe and Japan remain below their highs and we are generally bullish, especially while their currencies are weaker versus the US dollar.