December-Here’s To Your Wealth

  December 2016 and Outlook into 2017

The Markets:

In the fourth quarter of 2016, the U.S. stock market had a strong performance and was likely benefiting from three main areas of President-elect Donald Trump’s agenda: corporate tax reform, regulatory reform, and a robust infrastructure spending bill. To be sure, these areas can boost economic activity, corporate profits, and the stock market. That is probably why we’re seeing the recent run-up in stock prices. The questions remain, “How much of any economic benefit has already been realized by the markets, and how much economic growth will we see in 2017?” Here are six reasons why we think that, while the outlook for the economy is good in 2017, taking a deliberate approach, rather than following the herd with blind optimism, may make sense.

Click here to see Mark’s 2017 Outlook on Fox Business Network.

Political Uncertainty. It is unlikely that the Democrats want to roll out the red carpet to the new President-elect, and even some in his own party will not quickly rubber stamp all his proposals. For example, there are deficit hawks in the Republican Party who are concerned about how to pay for a huge infrastructure spending bill, fix the VA, and rebuild our military. Even if the Trump policies are enacted, it will be a while before they take effect, and any success they have will be met by counter forces and natural economic headwinds.

Economic Headwinds. An increase in economic growth may be accompanied by higher interest rates and a stronger dollar. We may also see higher oil prices, provided that OPEC doesn’t cheat on its recent deal to limit production. Higher interest rates and higher gas prices can negatively impact consumer spending and ultimately corporate profits. Also, growth from the Trump policies may propel the U.S. to be one of the developed world’s fastest growing economies; but that growth may lead to higher interest rates and a stronger dollar. A stronger dollar can subsequently crush the competitiveness of U.S. exports and hurt profits of U.S. multi-national companies. We see this potentially higher U.S. dollar as one of the biggest factors to consider in 2017. We also think the Fed’s ability to enact the monetary policy that it is planning (raising interest rates) will be impacted by how strong the dollar is relative to the rest of the world. If the European economy continues to stagnate, and the U.S. economy grows, the Fed may not be able to raise rates as quickly or as often as it would like.

Market Valuations. The stock market is fairly valued or even slightly overvalued by historical standards. Of course, the market has been richly priced before and is still able to move up if there is a catalyst (e.g., an increase to corporate earnings). It seems the market may be banking on a best-case scenario of the Trump agenda  and failing to consider the  mitigating factors such as a reluctant Congress, global instability, political risk overseas, and other factors.

Weak European Economies. As we saw with the ‘Brexit’ vote, there is political instability in Europe. Continental Europe continues to deal with high unemployment, virtually no economic growth, and potential bank failures, such as those we’re seeing now in Italy. The Italian economy dwarfs the Greek economy, and recall what happened to markets when there were fears of a Greek default.  Any Italian bank failures will have a global impact, and the recent run-up in large-cap U.S. banks doesn’t seem to be accounting for this concern.

Event Risk. In addition, there is the never-ending specter of unforeseen acts of terrorism in an increasingly unsafe world.

Protectionism and Tweet Risk. While it certainly sounds good to save and fight for American jobs (and who doesn’t want to see thriving factories here at home), but if the protectionist fever spreads to other countries, that may set off some serious unintended consequences. And we have similar concern about those seemingly populist and appealing tweets. Continued jawboning of American companies may have a chilling affect on their profit making ability and may also lead to unintended consequences.

All that said, if U.S. corporate earnings catch up to the hype, and we avoid or manage through some of these risks, we expect stocks to benefit from the Trump agenda of corporate tax reform, fewer regulations, and infrastructure spending.

 Quote of the Day:

“The future is uncertain and the end is always near.”-  Jim Morrison