PHILADELPHIA -- The U.S. stock market is at historic highs, Britain is readying to exit the European Union, China is still grappling with a slowdown and interest rates are hovering near zero. What will 2017 hold?
Vanguard's global heads of equities, bonds and active mutual funds made some predictions in a talk to this week's Bogleheads meet-up, which gathered fans of Vanguard founder Jack Bogle at Vanguard headquarters for a visit. Vanguard specializes in low-fee and index-fund investing, and it has grown to become the largest mutual fund company, with $3.5 trillion in assets.
Joe Brennan, the global head of the Vanguard Equity Index Group, said that the outcome of the upcoming presidential election would likely have a "low effect long-term" on market performance. He added that despite the uncertainty over the Donald Trump vs. Hillary Clinton race, the market had seen historically low volatility over the summer. That suggests that the market doesn't have the jitters just yet.
Brennan manages $2.2 trillion in assets -- although since that money is in index mutual funds, he doesn't pick stocks, but instead allocates the money according to the dictates of the S&P 500, FTSE international index, or whichever is the benchmark for a given fund.
Brennan also sees big long-term growth on the horizon for China. "It's going to be a huge growth story for years to come," he said. And the Chinese stock market is becoming increasingly liquid for foreign investors, which means that the costs for U.S. buyers of Chinese stocks are going down.
Greg Davis, who manages $1.1 trillion in fixed income assets as global head of the Vanguard Fixed Income Group, added that the Chinese market will influence interest rates as well as markets in commodities, energy and other areas. China will have an "outsize influence" on global GDP growth -- which will impact bonds as well as stocks, he said.
John Ameriks, the global head of the actively managed Vanguard Quantitative Equity Group, said that it's difficult to guess about what will happen in the future, but investors can protect themselves by diversifying their assets to limit risk.
"Diversification is about the only thing that comes close to a free lunch in the markets," Ameriks said. "We believe so strongly in risk control."
Davis agreed that investors should pay close attention to how risky their portfolios are. Due to continued very low interest rates, many investors have moved away from shorter-duration government bonds and into junk bonds to get more yield. Others have bought into real estate investment trusts or dividend stocks in search of income.
But fixed-income investments shouldn't be exciting, Davis cautioned, and investors shouldn't overextend themselves in reaching for yield. Investors should still counterbalance the risk of holding stocks by also buying some "very high quality bonds to have that diversification benefit," he said.
The market does look a bit scary in 2017. "Equity valuations are a little stretched, bond yields barely cover inflation; low growth, low inflation," Brennan listed. He recommended that investors "control what you can control" -- like managing taxes; seeking low fees; and allocating stocks, bonds and other assets carefully to limit risk.