Monthly Market Insights | January 2017

U.S. Markets

The post-election rally in the stock market gathered fresh momentum in December, but lost steam following a Fed rate hike and the onset of holiday trading.

For December, the Dow Jones Industrial Average jumped 3.3 percent, the Standard & Poor’s 500 Index gained 1.8 percent and the NASDAQ Composite rose 1.1 percent.1

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After slipping in the first days of the new month, stocks renewed their climb higher, setting new records on major indices. The market maintained its optimistic view of the anticipated economic direction that a Trump presidency may take, focusing on the potential positive impact expected tax cuts, infrastructure spending and deregulation might have on economic growth and corporate profits.

Fed’s Influence

The climb in stock prices stalled in advance of the Fed decision to raise the federal funds rate by a quarter-percentage point. The Fed also suggested that it might increase rates further in 2017 by three-quarters of a percentage point. This took some of the wind out the equity market’s sails and led to a higher U.S. dollar and tumbling bond prices. (Bond prices move inversely to yields, so as yields rise, bond prices decline.)

Amid thin holiday trading the market moved lower, shaving off some of its December gains.

For the Year

For 2016, the Dow Jones Industrial Average gained 13.4 percent and the Standard & Poor’s 500 Index rose 9.5 percent. The NASDAQ Composite picked up 7.5 percent.2

Sector Performance

Most industry sectors ended higher in December, led by Energy (+6.65 percent) and Financials (+4.46 percent). Other sectors posting gains included Consumer Staples (+1.11 percent), Industrials (+0.18 percent), Materials (+1.25 percent), Real Estate (+0.26 percent), Technology (+1.39 percent) and Utilities (+1.18 percent). Consumer Discretionary (-0.55 percent) and Health Care (-0.32 percent) sustained minor losses.3

charts-table-1

World Markets

Global markets ended the year on an encouraging note, with the MSCI-EAFE Index rising 2.8 percent for the month.4

European stocks staged a broad rally to end 2016. Major markets posted strong gains, including Germany, France and the U.K.5

Pacific Rim markets were mixed, as Australia benefited from higher commodity prices, Hong Kong fell on a weaker Yuan and capital outflows from China and Japan settled higher.6

charts-table-2

Indicators

Gross Domestic Product: An earlier estimate of third quarter GNP growth was revised higher to 3.5 percent, up from 3.2 percent. While the increase represented an exceptional growth rate for the economy, the overall economic growth rate through September 2016 remained consistent with the tepid growth that has marked this long economic expansion.7

Employment: The unemployment rate declined to its lowest level in nine years, dropping to 4.6 percent from 4.9 percent a month earlier. Workers’ wages also gained, rising 2.5 percent over November 2015, as employers competed for workers in a tightening labor pool.8

Retail Sales: Sales at retailers ticked 0.1 percent higher in November, a disappointing slowdown that some attributed to uncertainty about the U.S. election. Nevertheless, retail sales were higher over the same month last year by 3.8 percent, suggesting a better start to the holiday shopping season.9

Industrial Production: Industrial output by factories, mines and utilities fell 0.4 percent as a consequence of unseasonably warm weather in November. Capacity utilization also slipped 0.4 percent to 75 percent.10

Housing: Housing starts fell 18.7 percent from a robust result in October. However, over the last three months, housing starts have been at their highest level since the end of 2007.11

Sales of existing homes rose 0.7 percent, the third consecutive month of higher sales. Thirty-two percent of November sales were from first-time buyers, while over 20 percent of sales were all-cash transactions.12

New home purchases climbed 5.2 percent, the largest one-month gain since July. Through November, sales are 12.7 percent higher over the same period last year.13

CPI: For the fourth straight month, consumer prices moved higher, rising 0.2 percent in November. Prices were also higher when compared to November of last year, up by 1.7 percent—the biggest increase since October 2014.14

Durable Goods Orders: Orders for civilian aircraft dropped sharply in November, leading to a 4.6 percent decline in durable goods orders. Excluding transportation orders, orders for long-lasting goods increased 0.5 percent.15

The Fed

The Federal Reserve announced on December 14 that it would hike the federal funds rate by a quarter of a percentage point, with Fed officials signaling their expectation to raise rates by another 0.75 percent in 2017, which may come in three separate quarter-point moves. The decision to hike rates at a faster pace than previously anticipated reflected the Fed’s escalating conviction in the economy’s strength and stability.16

What Investors May Be Talking About

Markets are expected to watch carefully to see what President Trump attempts to accomplish in the early days of his presidency with a Republican Congress. Many of the initiatives that have been discussed by the President-elect have the potential to further impact stock valuations. Among them are:

  • The rollback of environmental, energy and climate policies enacted by the Obama Administration.
  • Corporate income tax reform to reduce taxes, eliminate deductions and repatriate overseas profits with a one-time reduced tax assessment.
  • The withdrawal from trade agreement talks (Trans Pacific Partnership) or the renegotiation or withdrawal from existing trade agreements (NAFTA) may benefit some companies, but could harm others with substantial exports or overseas manufacturing.
  • The reduction of corporate regulations may influence profits. For example, revamping Dodd-Frank Wall Street Reform and Consumer Protection Act may prove beneficial to financial companies’ profits.
  • The Affordable Care Act may be up for a significant rewrite or even repeal, though without knowing what replaces it, it is difficult to estimate the impact any health care law changes may have in the market.

Of course, disappointment in achieving some of the anticipated changes that have driven markets higher since the election may be cause for a broad price retreat.

In any event, experience teaches investors that overreacting to current events can be counterproductive to long-term investment strategies, but ignoring them entirely runs its own set of risks.

 

 

 

 

 

  1. The Wall Street Journal, December 31, 2016
  2. The Wall Street Journal, December 31, 2016
  3. Interactive Data Managed Solutions, December 31, 2016
  4. MSCI.com, December 31, 2016
  5. MSCI.com, December 31, 2016
  6. MSCI.com, December 31, 2016
  7. The Wall Street Journal, December 22, 2016
  8. The Wall Street Journal, December 2, 2016
  9. The Wall Street Journal, December 14, 2016
  10. The Wall Street Journal, December 14, 2016
  11. The Wall Street Journal, December 16, 2016
  12. The Wall Street Journal, December 21, 2016
  13. The Wall Street Journal, December 23, 2016
  14. The Wall Street Journal, December 15, 2016
  15. The Wall Street Journal, December 22, 2016
  16. The Wall Street Journal, December 15, 2016

 

Source: Lake Avenue Financial

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