Investors welcomed the New Year with the major US indexes at record levels, an unexpected event after a year of many unexpected events (e.g., Brexit, Chicago Cubs, Trump). The broader-based S&P 500 Index recorded its sixth best year of the millennium, amid optimism the malaise that has been the norm for most of this period may be ending.
Few investors have a crystal ball that can foresee how 2017 will evolve; making a Big Call and positioning your investment portfolio accordingly is typically a fool’s errand. 2016 certainly proved this point. But we can make a stab at what may be trends or events that will shape the trajectory of the stock market:
- Lower corporate tax rates will boost earnings, support higher stock valuations
- Lighter regulation increases flexibility and reduces compliance costs
- Lower personal tax rates will boost spending and savings
- Higher federal budget deficit will stimulate growth
- Expanded energy production will keep a lid on energy costs, boost capital spending
- Foreign earnings repatriation will spur greater corporate spending (investment, dividends, share buybacks, M&A)
- The Fed has already responded to the potential for faster growth and inflation by increasing its projected number of interest rate hikes in 2017 from two to three
- Higher interest rates could crimp expected profit growth, slow housing and capital expenditures
- Tighter credit conditions may lower auto sales, cutting employment in the sector
- Threats of protectionism could alter trade relationships and investment in US operations
- Higher inflation could prompt the Fed to increase short-term interest rates (the Federal Funds rate) faster and higher than expected
- LIBOR rates (short-term borrowing rates between banks and the benchmark for many corporate loans) have already increased from 0.50% at the end of 2015 to nearly 1%
- Interest costs for the federal debt will increase, potentially forcing Congress to reduce projected levels of tax cuts and spending
We will know by the end of the 2017 if this year does indeed mark a turning point in the economy and hopefully we will have fun doing so! Thank you for your continued trust and confidence in our firm. Happy New Year!