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January 11, 2017

Rising Consumer Confidence Leads Equity Markets Higher!


2016 was a volatile year for the global economy and the world’s financial markets. The year began with the markets and the economy drowning in pessimism, but ended with consumer confidence at a 15 year high and the DJIA knocking on the door of 20,000.  One might say that investors have blind optimism in pushing the DJIA to all-time highs given the fact that significant obstacles remain in the path of our economy.   Mr. Trump is likely a big part of the reason for this optimism.  His campaign identified and shouted from the mountaintop the problems that have handcuffed the globe’s economic superpower for the last decade.

Whether Mr. Trump can seek and destroy these obstacles and clear the path for America’s economy remains to be seen. Nonetheless, investors seem excited about his plans despite no improvement in the earnings recession that has gripped America for the last two years.

Domestic US stocks moved higher in 2016 with the S&P 500 gaining over 11% for the year and close to 4% in the last quarter.  Leadership in the equity market changed after the election.  Growth stocks carried the baton during the first through third quarters of 2016 and then handed the baton to value stocks after the election.  Defense, aerospace, industrial giants, energy, and bank stocks, that had performed poorly for the last few years quickly came to the top in the last few months of 2016 as leadership in growth stocks paused as investors weighed Mr. Trump’s plans to renegotiate trade deals with Asia and end the theft of US technologies in China.  Foreign markets sold off as a result of these statements and emerging markets fell 5% or more in the fourth quarter (EEM -5.4%).

Mr. Trump’s plans for cutting corporate taxes caused a significant selloff in the bond market. Treasuries and investment-grade corporate bonds performed poorly in the fourth quarter.  Long treasuries dropped over 12% in the fourth quarter (TLT -12.6%). Gold likewise plunged 13% in Q4 along with other commodities.  The rise in interest rates was not greeted well by real estate investors and REITs fell 3% to 10% in the fourth quarter. US Stocks were the sole asset class that performed well in 2016 and as a result diversified portfolios had only modest gains for the quarter and the year. Volatility also chipped away at performance as nervous investors braced the storms that occurred in February as the economy threatened to fall back into recession.

2016 was marked by modest but steady growth in consumption.  Retail sales rose over 3% led by strong demand for consumer durable products.  Demand for financial services continued to improve and the banking sector is finally showing modest growth. Demand for healthcare remains at all-time highs with strong growth in pricing.  Consumer confidence as measured by the conference Board rose to 113.7, a level not seen since 2002.  Most of this rise came after the election.  Corporate investment remained flat to lower as corporate America seemed content with its capacity given only modest growth in trends with consumer spending. 

Global debt remains the primary obstacle to strong economic growth and is compounded by poor political policy and a regulatory environment that is burdensome and ineffective.  The size of government is far too large and the cost of supporting it is a burden on American consumers and corporations. 

Inflation remains benign despite the US economy now at or near full employment.  Central bank policy continues to be accommodative but is gradually turning toward neutral.  The Fed has now raised rates twice as it works to bring policy back to normal.

Washington policy remains the wildcard with much still unknown about Mr. Trump’s plans. Trump has talked a good story but can he deliver? America needs better trade deals, better protection of its products in the global markets, and objective leadership. These problems are not new and we have not had a president in decades willing to take on this sort of challenge.  Mr. Trump seems serious about his plans for significant change and is surrounding himself with a cabinet of accomplished business people to help him achieve his goals.

Historically, Washington has not had much impact on the economy due to politicians inability to increase confidence.  The White House’s biggest hammer lies in its ability to foster confidence so Americans will spend and consume.  The President along with the Congress can also be effective by creating a fertile environment for economic growth.  This means favorable trade deals and just the right amount of regulation for fair competition.
The markets will likely move higher as Mr. Trump continues his plan of change.

We remain optimistic.

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