Warmer Weather Ahead?
What’s the forecast?
The short answer is, no one really knows. There were very few prognosticators that predicted a Trump victory, and even fewer who thought a sweep by the Republicans would lead to a major stock market rally and bond market selloff. But that’s where we find ourselves. Stocks are up in the US in the low teens—almost 10% more than most folks expected a year ago. Interest rates are up modestly. A year ago, many thought the Fed would steadily raise rates. An early market sell-off put them on hold.
The consensus expectation for next year is for continued economic growth and modestly rising markets and interest rates. The prospect of regulatory and tax reform along with some fiscal stimulus means that the Fed is no longer the only game in town. For years people complained that the Fed was single-handedly supporting the economy, but that ultra-low interest rates were distorting incentives. Who thought that a populist real-estate developer would shock the system out of its slow-growth equilibrium? But that’s what seems to have happened.
The market’s consensus for 2017 is for slightly higher growth in the economy, a modest push upwards in interest rates, and for a modest increase in the stock market. I see no major reason to disagree. The mood noted by corporate managers is significantly more upbeat than it was a year ago. There’s optimism, but no big orders yet. Retail sales seem to be in good shape, especially online sales. But a strong dollar, rising interest rates, and modest growth overseas will make it difficult for growth to take off.
S&P 500 over the past 5 years. Source: Bloomberg
Still, the economy — and markets — are full of surprises. In many ways, forecasting the market is like forecasting the weather. There are all kinds of cross-currents and complicating factors. The only thing that is certain is that the outlook will change.
Douglas R. Tengdin, CFA
Chief Investment Officer