Commentary on the Market: 4th Quarter 2016
Ruben’s Commentary on the Market
Fourth Quarter/Year End Update 2016
What a difference a year makes. During the Fourth Quarter of 2015 the U.S. had experienced weak corporate earnings and an economy that was still experiencing sluggish growth. 2016 started with the markets down 6% right out of the gate. The leading economic stories were a fear that the faltering Chinese economy was going to have a negative impact on the world economy, and that the U.S. economy was not strong enough to sustain itself in addition to a weak Europe without returning to an economic recession. There was also concern of what the fallout would be if England formally departed the European Union (BREXIT) .
Considering that 2016 began with lackluster, sometimes scary, performance coupled with unnerving volatility spurred on by the unorthodox Presidential Election, many longed for happier days. The mood changed for the positive following the November 2016 Presidential Election and into early 2017 with stocks pushing higher on hopes that new Trump era policies would reduce regulation and taxes while spurring infrastructure spending. The markets are still in a wait and see position until the new President takes office and he formally begins to implement policies. There is hope that the renewed confidence in the economy will be supported by true economic growth.
The Federal Reserve Bank appears confident that the economy is improving. The Fed Governors acted to raise rates in the 4th quarter and have indicated that they are targeting three additional rate increases during 2017. This is a clearer sign of economic growth.
On a positive note, the global economy expanded in 2016, which was positive for the banking and financial sectors of the world markets. The acceleration of global growth was aided, in part, by China’s economy stabilizing after a frightening start to the year. Additionally, improved global industrial activity and further economic growth in the United States played a significant supportive role in helping to steady the global economy. The improving economic activity set the stage for rising bond interest rates in the U.S. and, as a result, creating the strongest dollar that we have seen in the past 15 years.
All major stock indexes posted gains in the fourth quarter and overall for 2016 with much of it realized in late 2016 following the U.S. presidential election. Small Cap (small company stocks) performed particularly well as compared to large cap stocks (large company stocks). This was partly due to the rise of the stronger dollar, which impacts larger companies with more global ties. Financial stocks fared well due to rising interest rates and greater expectations of bank deregulation. Industrial stocks rose as well on hopes of infrastructure stimulus. While these sectors experienced healthy growth, healthcare stocks lagged due to uncertainty over what will happen with Obamacare. Shrinking corporate earnings appeared to have bottomed out and began to turn upward as the energy and manufacturing sectors recovered from the sharp drop in energy prices.
As we enter 2017, pro-growth policies could well have an added positive impact on corporate earnings. The U.S. has seen job growth for 75 straight months. This is a good sign for the economy. However, the personnel costs associated with a larger workforce along with higher interest rates could well squeeze overall earnings.
I remain confident that the economy is headed in the right direction as we begin 2017. The President Elect has made many bold promises regarding bolstering the U.S. economy by pushing U.S. companies to maintain and expand a domestic workforce. The inauguration speech should be very telling, but the proof will come when policies are implemented. Overall, I feel that we turned the corner in 2016 and our economy is pointed in the right direction. I am anxious to provide a positive report at the end of the 1st quarter of 2017.