January 12, 2017
Quarter in Brief
In the fourth quarter, two major events influenced the financial markets, however, neither upset investors. The election of Donald Trump led to a Wall Street rally and the December interest rate hike by the Federal Reserve was taken in stride. The S&P finished the quarter up 3.25% and on the whole the most-watched U.S. economic indicators were encouraging.
Domestic Economic Health
The Federal Reserve announced its second quarter point rate hike in two years on December 14th. The forecast for 2017 shows three planned rate hikes. Employment statistics remained strong with average monthly payroll gains of 180,000 for 2016 through the end of November. The preliminary report for December was below the average at 156,000. The unemployment rate finished December at 4.7%, up 0.1% from the 4.6% all-time low. Consumer confidence improved throughout the quarter as measured by both the Conference Board and University of Michigan’s measure of household sentiment. Consumer spending finished 2016 averaging the highest level since 2008 and as of November the core CPI was up 2.1% over the previous 12 month period.
US government 10 year notes rebounded from a three year declining trend line following the election. This reversal is based on the prospect of increased government spending and tax cuts under the new administration. This action is expected to increase government borrowing to support the spending and therefore, push risk and yields higher.
Global Economic Health
The Eurozone economy continued modest growth throughout the year with quarterly growth in the range of 0.3% -0.5%. For the year, GDP growth is expected to finish at 1.5%. The European Central Bank has announced the continuation of the economic easing program through the end of 2017. Perhaps the most significant development was the OPEC accord reached late in November to reduce oil production by 1.2 million barrels per day. This action has resulted in at least a short term improvement in domestic oil prices. Emerging equity markets saw downward movement from the previous quarter but the trend for the year was net positive with extreme volatility.
In 2017 we will enter the unexplored world of Trumponomics whose effect will not be fully appreciated for probably a year. In spite of this unknown, economists are expecting the US GDP to grow at the rate of 2 to 3%. A wildcard in this outlook is the strength of the dollar, which, if it continues, can act to throttle economic growth. The financial markets have been decoupled from the economy for a number of years and it appears that this will continue for 2017. As has been cautioned for at least the past three years, economists see a moderate possibility of a bearish movement in the market as more strain is placed on equities to increase profits and returns.
In the Eurozone and Japan, 2017 is forecast to be more of the same. The economic easing and negative interest rate programs are not stimulating economic growth as it was hoped. 1.0% annualized real GDP growth is predicted for both of these economies.
There is a more robust prediction of 4% growth for 2017 in emerging markets. This correlates with the improvement that is being seen in the commodity markets. The primary risks to achievement of this growth are the unknown trade policies that could come from the Trump administration and continuation of a strong dollar.