EC Prospects For International Stocks, Value Stocks, And Bonds In The New Year

As the new year begins, the biggest questions investors should be asking themselves are these: Is the existing investment backdrop around the world set to change under a seemingly hard-to-predict President Trump administration and if so, how, followed by what are the ramifications of near certain higher interest rates in the US and possible big political and economic shifts elsewhere, especially within Europe as a result of upcoming "Brexit" negotiations and several national elections?

In my opinion, it is still too early to be able to anticipate clear answers to these questions, not to mention whether any such changes brought about by such events will result in big changes to the existing investment climate we witnessed throughout much of 2016, at least through the pre-election period. However, some investors are already jumping into action under the assumption that they can already, even before the late Jan. Presidential inauguration, correctly anticipate the winners and losers of 2017, or even beyond.

Realistically, though, some of these assumptions might be thought of as resembling "if a, then b, and thus c," such as, for example, the one regarding Trump's proposed increased spending on roads, bridges, and airports: "If more infrastructure spending, then more growth, thus more gains for stocks." In effect, not only has "a" come to pass, but then "b," and then "c" must follow as a result in order to be correct. Such an analysis in advance of any these actual outcomes would appear to be a risk-laden proposition since it is possible that at least one of the three assumptions might turn out unexpectedly.

Therefore, a prudent course of action would appear to be, at most, acting in advance only on those investment outcomes deemed most highly likely, and waiting for further certainty on all others. Especially with all US stock indexes nearly at historic highs, additional purchases based on as of yet unconfirmed multiple cascading assumptions may have only a small upside potential for new investment gains vs. larger downside ones. And while international stocks, especially in Europe, could possibly be in for more trouble, selling the most underperforming multi-year categories of ETFs/mutual funds, such as many international funds have been, often doesn't turn out to have been wise move a year or two down the road.

While the above might be viewed as general guidelines, I will now focus on three categories that investors might fail to recognize as having the most potentially changed outlook, not only for 2017, but perhaps for at least several years ahead: international stocks, value stocks, and finally, domestic bonds.

International Stocks

Several years ago, investors were piling into international stocks as advisors and pundits alike touted the benefits of diversification, often through international index funds and ETFs. For example, assets in the Vanguard Total International Stock Index (VGTSX) had, as of the end of the third quarter 2016, more than doubled over the prior three years, jumping 135%. Yet investors remaining in the fund over the entire period suffered with less than a +1% annualized return.

While undoubtedly many of these recent investors will hold on in the hopes of better days ahead, one may wonder whether such results are indeed likely, or whether they are likely to continue to badly underperform the US markets. More up-to-date, over the last 3 years through year end, the annualized return on the average international fund has now become negative at about -2%.

So what will now help determine the future course of your international stock fund? As you may be aware, slow growth, and in some cases, especially so, such as in Japan, has characterized many of the major economies around the world. While generally good for international bonds, slow growth tends to hold back stocks. Looking forward, then, will growth start to improve in the most important world economies?

Within both Europe and Japan, central banks have been struggling to pull their economies out of near recessionary conditions for several years now by dropping interest rates with only mixed results. Will they be any more successful in 2017 than they have been previously?

Both regions are apparently more fully recognizing the need for more than just interest rate maneuvers now that such actions can hardly drop rates any further without causing potential disruptions to their economies. Increased government spending may thus begin to be more fully utilized as a necessary next step to promote more growth.

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Disclosure: I do not wish to recommend neither BUY, SELL, or HOLD for the 3 mutual funds mentioned in my article entitled “Is Skill Still Relevant in the Era of the Indexes?”

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Joe Economy 4 years ago Member's comment

Perhaps with so much potential volatility in Europe due to concerns about Brexit, Italy, Greece, and worries over China's debt, we should look towards safer index investing ideas and ETFs. Perhaps sticking with the tried and tested ones is safest in the long run; SPY (9.8%YTD), IWM (18% YTD), DIA (12.5%YTD). Any thoughts?