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Investing Lessons From 2016

Brent Schutte, CFA •  February 24, 2017 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we talk about lessons to learn from 2016 and look ahead to 2017.

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for more than $118 billion in assets under management as of December 2016.

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below):

Mark: 2017 started out with the Dow on the upside. We’re up to past 20,000, which is really a contrast to the start of 2016. Brent, I remember one of your themes for the year, based on music, was “Ain’t No Mountain High Enough.” So, does that sum up 2016 for you?

Brent: I think back to 2016 and I think about the pessimism that enveloped the U.S. economy—and the U.S. markets, for that matter. If you think about the way we started off the year, we opened the year down 13 percent, I believe, in the first 20 days of January. Then we bottomed out for a while. And then the market moved higher. The interesting thing is that all the while investors were pessimistic. They were worried about Brexit, they were worried about the election.

If you look at the AAII bullish sentiment survey, we had four readings below 20 in 2016. To put that in context, if you go back to the great recession of ’07-’08, there were only two other readings below 20 percent.

So investors did what we try to teach them not to do. If you look at fund flows early in the year they bought bonds and sold stocks. Later in the year they tried to play catch-up: After the market moved higher, they bought stocks and sold bonds.

So as I look back, “Ain’t No Mountain High Enough” was a reference to the fact that people actually went into the fourth quarter pretty pessimistic. Then we had the election and the pessimism was over. The economy did better than what people imagined, and they had to reverse their pessimistic stance and try to buy stocks.

Mark: What would you say to those investors in 2016? Good job? Bad job?

Brent: I think it’s probably a bad job. The goal is to buy low and sell high, not the opposite. That’s why I think every investor should have a plan. And actually, I’m not suggesting that you have to exactly stick to that plan 100 percent, but it should be a very strong anchor. If you have a goal that’s 10, 15, 20 years in the future, plan for that goal, make some tweaks along the way, but don't wholesale sell in or sell out of stocks.

Mark: I like the analogy I’ve heard you make about if you’re driving from Chicago to Milwaukee, you have one path, but you might diverge if something comes up.

Brent: I mean most of the time what you do is if you’re driving Chicago to Milwaukee, you would take a look at a map and you would have the most optimal route to get you there. But during that time period there’s going to be construction … roadblocks … traffic jams, and you may want to slightly deviate from that path during certain periods.

And so that would be the dynamic asset allocation that we believe you can add value to an account over a long period of time.

Mark: Now, later in the year, sticking back to your song analogies, “Turn, Turn, Turn” was something I think you wrote in the third quarter. Did that also refer to the consumer sentiment?

Brent: The third-quarter commentary was titled “To Every Season, Turn, Turn, Turn.” We think the current rally is more fundamentally based; it seems as if people are becoming more optimistic and that economic fundamentals in the U.S. and abroad are firming.

We seem to be shifting into a new part of this recovery, where “animal spirits” are coming back. The consumer is going to start buying again after saving for years; corporations may actually start building plants and equipment after pretty much not doing that for years. It feels like we’ve tipped into a new part of the recovery. The one thing that I’ll caveat there is that people have talked about the uncertainty of this recovery, and it has been uncertain.

Most economic recoveries or expansions end with something in excess. As they look into 2017, some strategists say this recovery has been eight to nine years in the making, and just because of time it has to die. We would argue that because of the uncertainty, people haven’t done the dumb things (think about buying two, three, four, five houses with no money). So I would urge you to avoid the worrying about how long this recovery has been. This one will be longer than the past.

Mark: You’ve mentioned that everybody seems to be in pretty good shape—consumers, banks, companies. So if some of those exigent circumstances that would be behind some more catastrophic kind of condition just aren't there …

Brent: As you look into ’17 and we talk about the consumer, the balance sheet is in the best shape it’s been since the 1990s. Consumers are in a good place. They’ve saved money and paid down debt. Banks are in the best shape they’ve been in years. They’ve been forced to do that via legislation and regulation. They’ve rebuilt their balance sheets to be able to withstand another crisis. They get stress-tested every year by the Federal Reserve, which typically includes a 50 percent market correction. You look at corporations, they’re in decent shape. And so it doesn’t appear that the normal characters that usually lead to a recession are in a bad place right now.

Hear more from Brent and Mark in the “Ask the Financial Expert” podcast:

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise; and conversely, when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. When interest rates are at low levels, there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates and are not obligated to return the investor’s principal. Additionally, high-yield bonds and bond funds that invest in high-yield bonds present greater credit risk than investment-grade bonds. Bond and bond fund investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

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