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For ordinary Americans, 2017 is likely to feel like the best year economically since the Great Recession.
The recovery is finally expected to trickle down to you in the form of an improved job market, higher wages, and growing spending power. "These are things we've been talking about since 2012 or 2013," says Tim Hopper, chief economist for TIAA Global Asset Management. "And now it's finally here."
And, despite the advanced age of this bull, your improving fortunes just may keep U.S. stocks chugging along too, as consumers represent 70% of the U.S. economy, says Nariman Behravesh, chief economist for IHS Markit.
Still, with economic growth expected to remain sluggish at 2.2%—and with all the unknowns surrounding the new Donald Trump presidency—you'll need smart strategies to turn a decent year into a great one financially. On the pages that follow, we identify the big trends that will affect your wallet in 2017 and offer 20 pointers on how to tweak your investments, advance your career, and be savvy in both everyday spending and your big-ticket housing decisions.
Trump's win raises uncertainties and risks, economists say, especially over trade policies. Still, tailwinds that are forming at the intersection of Wall Street and Main Street "should help stocks make some decent progress," says Jeffrey Kleintop, chief global investment strategist at Charles Schwab. Expect another year like 2016, with mid-single-digit gains.
Earnings for S&P 500 companies are expected to surge 12% in 2017, after being flat this year. Helping drive that: consumers with more dollars in their pockets.
Household spending has been meh, to use a technical term. But that should perk up along with pay. Average hourly wages could grow 3% to 3.5% in 2017, says Hopper. That could jump to 3.5% to 4% should Trump's promised infrastructure spending produce jobs. "The more you push job growth, the more you push wage growth," Hopper says.
Pick sailboats over motorboats…Investors in recent years favored shares of companies that don't require a strong economy to excel. Burt White, chief investment officer at LPL Financial, refers to these stocks as "motorboats," since they generate their own motion. Now he says it's time to look at "sailboats" that are powered by economic strength. They include technology shares that benefit from consumer spending, as well as retailers such as Home Depot and Lowe's.
An added advantage: These stocks are relatively cheap. Tech shares in the S&P 500, for instance, are trading at an 8% discount to their historical average price/earnings ratio, while the broad market is trading at a 10% premium. In our MONEY 50 recommended list, T. Rowe Price Blue Chip Growth (TRBCX) holds half its assets in economically sensitive tech and consumer discretionary stocks.
…But don't go overboard. Though equities are expected to rise for a ninth straight year, strategists and portfolio managers warn investors not to get overly optimistic. After all, the bull market is already more than twice as old as the typical rally.
Rather than boosting your exposure to equities, you might add a small dose of high-yielding junk bonds, says Terri Spath, chief investment officer at Sierra Investment Management.
Junk bonds are highly correlated with equities but offer some cushion. In 2008 junk bonds suffered only 70% of the losses of the broad equity market. Yet over the past 15 years, junk bonds have generated an average annual gain of 7%, which is nearly identical to the return for the U.S. stock market. A solid junk bond fund is Fidelity High Income (SPHIX), which is on our MONEY 50 list.
The economy isn't the only thing picking up steam. Inflation is expected to rise too, with consumer prices forecast to grow 2.3%, nearly double this year's pace, according to the Blue Chip Economic Indicators survey. With higher inflation typically come higher interest rates.
But don't worry about big jumps that could pump up your borrowing costs or clobber your bonds. Before the election, most economists expected two quarter-point rate hikes by the Federal Reserve in 2017. While Trump's election could speed up or slow the pace, that is still a reasonable expectation. That means the Fed's short-term rate target should stay close to 1%, four points below the historical average.
As yields inch up, households won't have to sock away quite as much money to meet their goals. That means people will feel more comfortable spending.
Favor income stocks that can also grow. Some income investors frustrated by low bond yields have shifted into dividend-paying equities. But when rates do rise, people are likely to turn back to bonds, which means classic high-dividend payers such as utility stocks are a risk. "You want to stay away from interest-rate-sensitive stocks," says LPL's White. Indeed, as yields on 10-year Treasuries have jumped more than half a percentage point since July, utility stocks have already lost 6% of their value.
You don't have to give up on dividends. Just shift into funds that balance decent yields with dividend growth. Christine Benz, director of personal finance at Morningstar, has recommended Schwab U.S. Dividend Equity ETF (SCHD). The fund currently yields about 3% and has the lowest expenses among dividend-oriented ETFs, according to Morningstar.
Favor muni bonds. While bond prices move in the opposite direction of market interest rates, some forms of debt are less rate-sensitive than others. One such choice: tax-advantaged municipal bonds.
An uptick in economic activity and wages translates to higher tax receipts for the cities, counties, and states that issue muni bonds. Moreover, these bonds are starting off with higher yields than Treasuries, which allows them to weather rising rates better.
Ten-year A-rated municipal bonds are yielding 2.2% on average, slightly higher than the 2.1% you're getting on 10-year Treasuries. When you tack on the fact that muni-bond income is free of federal—and in some cases state—taxes, that 2.2% yield is actually the equivalent of 2.9% if you're in the 25% federal income tax bracket, and 3.3% if you're in the 33% bracket.
There's one more reason to go with munis in 2017. With President-elect Trump promising major infrastructure spending during the campaign—he alluded to more than $500 billion—and his party controlling both houses of Congress, the likelihood that Washington embarks on a new round of stimulus spending is rising. Spath of Sierra Investment Management notes that any push for national infrastructure spending is likely to create "huge increases in demand" for munis, which fund such projects.
One of the cheapest and most effective ways to get broad-based exposure is through Vanguard Intermediate-Term Tax Exempt Fund (VWITX), which charges expenses of just 0.2%.
Stocks in developing economies are likely to have another good year in 2017, after rising more than 17% so far in 2016. Investors certainly have waited long enough: The shares returned a mere 2.5% a year on average over the past decade, even including this year's advance. The turnaround has come as economic growth in the developing world finally picks up after a long cold spell. (You're showing your age if you remember when emerging markets were the engine of global growth in the early 2000s.)
The recovery isn't uniform, however. China, the biggest economy in the emerging markets, continues to slow down, with GDP growth expected to fall to 6.2% next year, from 6.6% in 2016 and 7.3% in 2014. Economies that are reaccelerating can be found in Eastern Europe, Mexico, Indonesia, and the Philippines.
You can thank the bounce in commodity prices, as many emerging economies are still tied to the mining and production of raw materials such as crude oil. Since the end of January, oil prices have jumped from around $26 a barrel to about $45. Prices aren't expected to rise as aggressively in 2017, but they are forecast to be stable. "The big downward pressure on commodity prices is over," says Thomas Clarke, comanager of the William Blair Macro Allocation Fund.
Replenish your emerging-markets stake…If you haven't rebalanced your equities in a while, do it now. A 10% weighting in emerging-markets stocks five years ago is down closer to 5% now. Be careful, though. Because economists don't expect a new bull market in commodities to take off, you may want to avoid funds with big bets on commodity-reliant companies.
T. Rowe Price Emerging Markets Stock (PRMSX), which is on the MONEY 50 list, holds less than 7% of its portfolio in energy, basic materials, and industrial stocks, with the majority of its assets in consumer-driven areas including tech.
…But go light on China. For years China drove economic growth in the developing world. But the country is now an emerging market in name only, mired by an aging population and a shrinking workforce.
Favor funds that limit exposure to China. The Harding Loevner Frontier Emerging Markets Fund (HLMOX) focuses on relatively small and fast-growing economies such as the Philippines, Colombia, and Kenya. Among index funds, Columbia Beyond BRICs ETF (BBRC) avoids the largest emerging economies (Brazil, Russia, India, and China) while focusing on consumer-driven markets such as Mexico, Malaysia, and Indonesia.
It's a job seeker's market. Openings hit an all-time high in 2016, according to the Bureau of Labor Statistics—and the 2017 outlook is particularly rosy for mid- to senior-level workers. "We expect robust demand for experienced workers," says Steven Lindner, executive partner of recruiting firm the WorkPlace Group. Meanwhile, the wage premium for switching jobs is near its highest point in years (see graphic, below). "People are leaving because there are better alternatives," says Andrew Chamberlain, chief economist at Glassdoor. "And generally, when people leave a job for a pay raise, it can be significant—10% to 20%."
Test-drive new tools. Try new apps like Jobscan, which lets you tailor your résumé to postings by identifying key words, or Switch, which works like swipe-right dating app Tinder to pair you with hiring managers. And use LinkedIn's new Open Candidates setting (see Fast Takes, page 14) to tell everyone but your employer that you're on the market.
Flaunt your skills. Even if you're not in IT, know which tech skills you'll need to get a new job in 2017, says Katie Bardaro, lead economist at job site PayScale. Update your résumé to highlight tools you already use—Workday software in HR, for instance. And if the ads in your field seek a skill you don't have, find classes nearby or online, via sites like Lynda.com and Coursera.
Use your leverage if you stay put. Don't want to leave your gig? Pay is forecast to rise only 3% next year for workers who don't change jobs—though high performers can expect a 4.9% bump, Mercer finds. Talk to your manager, says career coach Roy Cohen— and don't be afraid to brag. "You'll advance by highlighting areas of particular distinction," he says.
A crescendo of recent changes aimed at closing the gender wage gap has reshaped the compensation landscape for 2017. Massachusetts just made it illegal for in-state employers to ask about salary history—a question that tends to disadvantage anyone who has been historically underpaid—and the lawmaker who launched the bill says she's heard from peers in other states looking to replicate her effort (see "The MONEY Champions," page 52). New York City has already followed suit for municipal jobs, and a federal version of the rule is now in front of Congress. And at least 50 employers—including Apple, Hilton, and Visa—have signed the White House's Equal Pay Pledge, promising to analyze company pay levels and review hiring processes to reduce bias.
Ask for a revision. Suspect you're paid less than peers? Meet with your manager, says Marissa Peretz, of Silicon Beach Talent—and bring a list of accomplishments, in case your suspicions are true and you need to show you're not underperforming.
Peretz suggests starting with something like: "I overheard someone talking about their salary, and it sounds like I'm not being paid commensurate with my peers. Can we talk about why that is?" Tell your boss you appreciate the mentorship he or she offers and want to continue working together.
Then come up with a solution. Maybe you'll set up periodic goals and evaluations, with an agreed-upon salary bump for every benchmark that you hit.
Reset your negotiations. Looking for a new gig? It's still legal for most employers to ask about your pay history (even in Massachusetts, where the law won't take effect until 2018). Yet the attention given to the legal changes may give you more cover to duck the question.
You don't need to mention the new laws explicitly, says Alison Green, a workplace consultant. Instead, say something like, "I've always kept that confidential, but I'm seeking a range of X to Y," she advises.
Credit card perks are at record highs and are likely to keep rising in 2017, says analyst Matt Schulz, of CreditCards.com. Among premium cards, the new $450 Chase Sapphire Reserve—with up to a $1,500 bonus—is expected to draw copycats. "It wouldn't surprise me much if we saw somebody try to match what the Chase Sapphire Reserve is offering—or even top it," Schulz says. (More about the card on page 57.) And the sweet lures aren't just for big spenders: Cashback cards now offer an average of $100 to new cardholders, triple what they paid in 2010.
Don't ignore free money. If you pay your bill monthly and don't have a rewards card, you'll miss out. Several new cards offer 1.5% cash back on all spending, though none match the no-fee Citi Double Cash, one of MONEY's 2016 Best Credit Cards, which pays out a flat 2%.
Pick the right perks. If you spend a typical $2,000 monthly, with $500 on travel and restaurants, you'll do best long term with a cash back card like the Double Cash, instead of a travel card. And if you'll need a vacation splurge to earn a sign-up bonus, apply for a card a few weeks before you leave (or book a trip, if paying big costs in advance).
You probably already hail rides with Uber or Lyft instead of taxis, book vacation stays through Airbnb, or even hire help via TaskRabbit to assemble your Ikea bed. More than two-thirds of Americans used a shared service at least once in the past year. But eMarketer estimates the number of regular users will rise 14% in 2017, to more than 31 million, as consumers get more comfortable with such services. "People think that because Airbnb and Uber have gotten so big, we must be hitting a ceiling," says Rachel Botsman, a visiting lecturer at the University of Oxford. "But the space is still in its infancy."
Rethink spending habits. Sharing services can save you real money. Start with big-ticket items. A MONEY analysis found that a family could save about $18,000 over five years by selling its second car and using more public transit and car sharing.
Even smaller expenditures deserve a second look now, especially for short-term needs. For a winter getaway, for example, rent a snowboard through Spinlister. You could pay as little as $15 a day rather than shell out at least $59 daily at a resort like Vail. Other sites to try: Peerby, for tools and home goods; EatWith, which pairs home chefs with guest diners; and Rent the Runway, for designer dresses.
Just remember: Booking a room on HomeAway or Airbnb isn't like reserving at a Wyndham. Be sure to read ratings and reviews before you commit.
Weigh payoffs against the fine print. Looking to pick up extra cash? The sharing economy isn't just for millennials. People over 60 were the fastest-growing set of Airbnb hosts last year, AARP says, and one in four Uber drivers was over 50. But know the drawbacks before jumping in. Uber, for instance, takes 20% to 30% of every fare you accept. Airbnb charges just 3% on each reservation—but you could run afoul of city regulations or your homeowners association, so call town hall (or your local board) before listing your place. Also, rental income is subject to income tax if you have paying guests for 15 or more days a year. Keep meticulous records.
Forget a tale of two cities: Extreme housing market fragmentation is creating different experiences for buyers and sellers in a wide range of locations and segments. Nationally, home prices are expected to keep rising, albeit more slowly— 3.5% in 2017, vs. 4.5% in 2016, per Moody's Analytics projections. But even more than in recent years, your position now hinges on what and where you're buying or selling.
Hoping to escape a downtown condo for the suburbs? Your equity should go far: Small homes have seen much sharper price growth than larger ones, urban areas have appreciated faster than metro outskirts—and both trends are expected to continue in 2017. If you're in the reverse position, though, brace yourself: Inventory has tumbled among less expensive homes, and your money may not buy as much as you expect.
Growing families, make your move. If you're looking to trade up to a larger home, you're in the housing market's sweet spot, and the first part of 2017 should be a particularly good time to strike. Over the five years between 2011 and 2016, the average price on a two-bedroom house climbed 59% nationwide, while four-bedroom houses rose a more modest 41%, according to an analysis by Attom Data Solutions. Inventory has also risen at the higher end of the market, climbing almost 8% for homes in the $500,000 to $750,000 range.
Because you're well positioned as a seller, and you want to walk away with as much money as possible for your next down payment, choose a higher offer over a speedier close, suggests Lawrence Yun, chief economist at the National Association of Realtors.
Aiming small? Be flexible. If you're hoping to cash out and scale back—or if you're a first-timer looking for a starter home—you face a tight market with low supply and greater competition from rival buyers. Yet the more flexible you are, the more choices you'll have.
Willing to move farther from the city center, for instance? The average price per square foot in overall metro areas has risen 52% over the past five years, according to Redfin, but it has jumped 76% in the urban cores.
And while no one wants to tackle a major overhaul, buyers who are willing to make at least some upgrades can get a better deal, notes Svenja Gudell, Zillow's chief economist. You won't be alone: More than half of homeowners who bought in the past year got a place that needed at least some updates, according to a recent Zillow survey.
Meanwhile, retirees looking to move to sunnier climes can profit from what are now bigger variations between U.S. metro areas than have existed at any time in the past two decades, Yun says. He singled out Greensboro, N.C., where home prices have slipped 0.3% over the past year, as a possible retirement destination.
Lock in a lower loan rate. If you're ready to buy, now is a good time to pull the trigger on financing, since the record-low mortgage rates seen in 2016 aren't expected to last. Average rates could rise as much as half a percent in the next year, according to Dan Smith, president of Atlanta-based PrivatePlus Mortgage. That would mean an $864 increase in annual payments on a $250,000 mortgage if rates jump to 4.2% from the 3.7% average on 30-year fixed loans in November.
Remodeling spending is surging: It's expected to jump by 8.3% in the second quarter of 2017, up from 5.7% growth in the same period in 2016, according to an October survey from the Joint Center for Housing Studies at Harvard University. That's partly because of buyers purchasing houses that need a little work, but also because of a projected increase in discretionary income, says Abbe Will, an economist at Harvard.
Plan ahead. When remodeling surges, contractors get harder to find. Even if you're just mulling over a project, start talking to pros in your area early to understand prospective costs and timelines. Will also recommends planning projects for the winter months—December, January, and February—when demand ebbs slightly. That means you should make a move ASAP.
Pick your projects. Prioritize work that gives the best payoff, Will suggests. A minor kitchen remodel, for instance, would earn back an estimated 83% of what you spend at resale, according to a Remodeling magazine analysis (see chart, left), compared with just 65% for a major reno. To get the most bang for your buck, Will says, seek projects that boost curb appeal. Garage and entry door replacements, for example, were near the top of Remodeling's list.
At its best, Google marries awesome computing resources with algorithmic intelligence to create popular services that no one else can match.
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