Cautious optimism is a term investors are likely to hear a lot in the next few weeks, as stock market specialists roll out their forecasts for 2017.
Nigel Green, founder and CEO of deVere Group, is no different - he sees positive strides for the stock market going forward, but advises that investors take heed.
"It's likely that 2017 will bring good news for investors - but they mustn't be complacent," Green says. "They must remain alert. We're now in a very different landscape to where we have been for the last six or seven years, and this shift could impact investor returns."
The biggest threat to investors are the changing expectations for growth, inflation and interest rates in the U.S, which remains the world's largest economy, Green adds. "Even before he takes office, the data suggests that the U.S. economy has been given an initial boost from the forthcoming Trump presidency," he says. "Considering the likelihood of a stimulus package when he takes office, and given the already near full employment rate, inflation could go higher than the Federal Reserve's goal of 2%."
"Should this happen, the Fed could perceive the inflationary pressures as leading to an overheating of the economy and raise interest rates quicker than markets anticipate to cool it down," Green states. "Another risk is that the decline of oil prices from the highs of a few years ago will continue to have a significant impact on the finances of oil exporters."
Other stock market observers say inflation, Trump and oil prices aren't the only big risks challenging investors in 2017.
"Mathematically, I believe the single biggest risk in 2017 is that stocks are historically expensive, and we're 89 months into the fourth longest market expansion in U.S. history," notes Lyn Alden, equity research specialist and the founder of Lyn Alden Investment Strategy. "Investors may be too bullish or euphoric late into the market cycle."
That combination could easily lead to an economic contraction and market correction in the near future, Alden states. "A bullish business cycle can only last so long, and with stocks this highly valued, there is a lot to lose if things turn sour," she says.
Alden also notes the cyclically-adjusted price-to-earnings (CAPE) ratio of the S&P 500 currently stands near 28. "The only times in history the CAPE ratio was this high were for five months in 1929, preceding the market crash and for five years between 1997 and 2002 during the Dotcom bubble," she states. "That's not a good club to be in."
The data suggest more danger lurks ahead. "The market capitalization/GDP ratio of the market is at around 125%, which is historically very high and closely correlates with the CAPE," Alden adds. "This shows the market could easily lose 15% to 25% if it were to return to historical norms."
Investors should also take a closer look at yield-producing market categories this coming year, says Brandon Ackroyd, a private investor and a venture capitalist located in Leeds, U.K. "Any mainstream asset classes that produce a yield are a risk in 2017," he says. "Stocks, bonds and real estate are all in bubbles of some kind and they could well go pop. The bond market is at an all-time high that cannot last. And that's where the risks lie."
One of the consequences of central bank intervention with money printing and zero percent interest rates is that all the mainstream asset classes are tightly correlated, Ackroyd notes. "That's because financiers have sought a yield wherever they can find one and that brings about these bubbles," he says.
"With the economy worldwide looking precarious right now we'll definitely see investors managing risk by shifting capital from over-valued asset classes into under-valued asset classes," he adds. "When all the major asset classes are in bubbles, there is no 'cheaper' asset class to shift capital into, so it has to go elsewhere - likely with gold and cryptocurrencies absorbing some of that money and rising appropriately."
President-elect Trump's economic policies also rank high on the list of potential market uncertainties. "The incoming administration worries me most heading into 2017, although this administration is anticipated to energize the economy through spending and deregulation we still have to worry about President Trump's temper and emotions getting in the way," says Michael Cirelli, a financial advisor at SAI Financial in Warrenville, Ill. "We're still waiting to see what exactly he's going to do in his first 100 days which should give us a better idea of which policies he places the most value on."
Some market mavens take a discussion on risk with a grain if salt. It's important, they say, but don't let it overwhelm your investment decision making.
"I think the biggest risk got investors next year is the sane as every year, mistaking volatility for risk," says Paul Ruedi, CEO at Ruedi Wealth Management, Inc., in Champaign, Il. "Yes, stocks will fluctuate, but they fluctuate around a permanently rising uptrend."
"So in a nutshell, the biggest risk for most investors is not owning enough of the great companies of the world," he adds.