2016 ended on a down note with declines in U.S. Stocks last week. Foreign stocks generally saw smaller declines. Many things that had done well since the election gave back as profit taking seemed to be in play. The ten-year U.S. Treasury yield fell sharply. The dollar fell from near record levels against foreign currencies and gold (which typically moves in the opposite direction of the dollar) rose following a slump since September. As we look towards 2017 the main themes we see that will affect the markets are:
- 4th quarter earnings which will start reporting in January are expected to up 3.2%. 3rd quarter earnings were up following four quarters of falling earnings. Although, if energy stocks were removed from S&P 500 earnings they would only have been down one quarter. Still the exit from the earnings recession are expected to be a positive for stocks.
- Gross domestic product which was anemic in the first half of 2016 perked up in the third quarter. Fourth quarter GDP is expected to be good but perhaps not as big of an increase as Q3 was.
- Initial private surveys of holiday shopping were positive but the total retail sales picture remains to be seen until retail sales are released in January.
- Inflation, while still below the FED’s target of 2% is approaching it. So, this remains a wild card. Energy prices may continue to firm up although most forecasts do not show crude moving above $60 per barrel next year so this likely will contribute modestly to inflation. Rising wages may also increase inflation if not accompanied by productivity growth.
- Business capital spending remains weak. Without additional capital productivity growth is likely to be elusive.
- The FED forecasts three more rate increases in 2017. Of course, they predicted four for 2016 and we only got one. Fed short term rate increases, while typically negative for bonds are not necessarily negative for stocks. Historically, stocks remain positive unless the 10-year treasury is above 5% and is rising. With the 10-year treasury now at 2.45% it is unlikely we will hit 5% this year. Mortgage rates have risen from 3.5% to 4.2%. Further increases could dampen home purchases.
- From a policy perspective, the markets have priced in the following expectations for 2017:
- Less regulation – This can be can be positive particularly for financial and energy companies.
- Corporate tax reform – As the U.S. has highest corporate taxes of virtually every developed country this can help make U.S. Companies more competitive.
- Foreign earnings tax holiday – Allowing companies a onetime reduced tax rate of say 10% to bring offshore earnings into the U.S. could bring as much as $2 Trillion dollars.
- Personal income tax reform – A simplification of taxes with fewer brackets and fewer deductions.
- Improved trade to boost U.S. exports.
- We think it is important to realize that while these things may come to pass, they won’t be immediate and there are likely going to be policy disappointments affecting investments such as
- It is unknown what regulatory changes will take place and how quickly. More importantly, we need to be very careful not to throw out the baby with the bath water. Financial regulatory reform needs to create a path for banks to grow and remain profitable without allowing future bubbles or crises.
- Regarding earnings repatriation, history would say that this money will not all be spent on capital improvements and organic growth but most of it will go towards things like stock buy backs and acquisitions. Stock buy backs can boost stock value to shareholders. Acquisitions may result in job losses in the short run buy may boost productivity in the long run.
- Corporate tax reform, with some of the ideas floated, may create advantages for U.S. exporters but may hurt U.S. importers.
- While personal tax simplification is being discussed, it is unknown at this point if congress will allow it to reduce revenue unless there are offsetting revenues from other sources.
- It should be interesting to see how the new administration addresses the import tariffs, as large tariffs could hurt consumer spending and sharply increase inflation. While some jobs may come back, this will likely take time.
- It is unknown how foreign policy will unfold. Any missteps could create shocks to the markets.
At this point much remains to be seen with the new administration.
In the numbers this week:
- The S&P Core Logic Case-Shiller Indices showed U.S. housing prices rose 5.6% in the 12 months ending in October. This is higher than the 5.4% year over year at the end of September. The biggest gains were in Seattle 10.7%, Portland 10.3% and Denver 8.3%.
- The Energy Information Administration weekly report is attached. wpsrsummary-2
- Baker Hughes reported that oil drilling rigs rose by 2 to 525. Gas drilling rigs rose 3 to 132.
- The Labor Department reported Initial claims for unemployment fell 10,000 to a seasonally adjust 265,000. The four-week moving average of claims fell 750 to 263,000.
Please call us if you have any questions.
Loren C. Rex, CFP®, AIF®, MA Erik Smith
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
Visit our Website: www.genfinplan.com
Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.
These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results