2016 markets began the year with a six-week downturn, as concern over plummeting oil prices and an economic slowdown in China manifested in investor concern for a looming recession. On January 20th oil sold for a twelve-year low of less than $27 a barrel (currently $52 a barrel), and the Standard & Poor’s 500 Index was down 9% from the start of the year. By mid-February the S&P 500 was down a total of 10.5%, representing the stock market’s worst start to a year. Ultimately, investor sentiment shifted with an increase in the price of oil and the realization a recession was not imminent. The year ended on a positive note with the S&P 500 Index up approximately 9.46%. It should be noted that the third quarter of 2016 marked the end of four straight quarters of negative earnings which we think was in part responsible for basically a flat market for the past one and a half years.
Welcome to 2017. The current economic recovery turns nine this summer, making it the third longest in U.S. history, however this calendar-old recovery still appears young at heart, and a recession from several indications appears to be a few years away. We expect the U.S. real GDP growth of about 3% this year. As mentioned above, the third quarter marked the end of negative earnings growth and earnings began rising again the fourth quarter of 2016 and estimates suggest a healthy gain in 2017. In addition, consensus has the U.S. dollar rising as interest rates rise going forward. However, we think the U.S. dollar will actually weaken as has been the case in all interest rate hike cycles in the past..
As far as the bond market is concerned, we think the recent rise in bond yields will continue throughout the year. The combination of an incoming U.S. president promising a pro-growth and pro-business agenda, with economic growth accelerating, we think interest rates along with inflation will rise throughout the year. Since this is the case, we feel the best place to be is in the short maturity (1-3 years) range.
Elsewhere there are signs of a global economic bounce for the first time in years. This should help developed and emerging markets throughout the world. Throw in a weak dollar and we may get an additional bump in terms of market prices.
Finally, since we are in the latter stages of this bull market, we do not expect either a severe bear market or a strong bull market, but somewhere in between, meaning most likely a modest advance. We base this on the fact that we are in the mature part of the U.S. earnings cycle, where earnings are not likely to grow as fast as they did earlier in the recovery. In addition, stocks are no longer cheap and interest rates are no longer declining.
All in all, we remain optimistic on the markets and especially in view of the fact of a new pro-business presidency, whose policies can only add to the performance of the economy and the stock market (lower taxes, less regulation, more jobs, etc.).