2017 Outlook- Navigating a World in Transition

Investors enter 2017 facing a world in transition with the result of the U.S. presidential election and the earlier Brexit vote in the U.K. – reflecting a populist sentiment and possibly changing the decades long march towards globalization. The U.S., despite political uncertainty, sees stronger corporate earnings and a strengthening consumer driving stronger growth. A large fiscal stimulus in the form of tax reform, repatriation of corporate funds held outside the U.S. ($2.6 trillion) and infrastructure spending could provide another boost to the economy. Although valuations appear stretched --shares of companies in the S&P 500 traded at an average of roughly 21 times their past 12 months of earnings, above their 10-year average of 16* - with a pickup in earnings, the market may not remain so expensive.

Europe remains highly challenged with uncertainty about the European Union, low growth and high unemployment. Negative interest rates and anemic forecasts for growth of 1% to 1.5% leaves Europe vulnerable to outside shocks, i.e. further slowing of China's economy. We continue what we began in mid-2015 with a lower exposure to internationals and emerging markets.

Interest rates look poised to remain relatively low for an extended period, even if the Fed does 2-3 modest hikes in 2017. Our expectation is that these slow rate hikes will have a modest impact on long-term yields, as long as global demand for Treasuries persist. On that note, the U.S. rates are actually relatively high – in fact a standout in the developed world: U.S. +2.37%, Germany: +0.20%, Switzerland: -0.18%**

Portfolio strategies for 2017 include (1) making U.S. equities a core holding in the portfolio, (2) continue lower exposure to Internationals and (3) continue shorter duration bond holdings to dampen volatility and provide income. Some areas that are still below their cyclical adjusted P/E ratios include energy, materials and IT.

*Factset / **Thomson Reuters as of 11/30/2016