U.S. Stocks finished 2016 in strong fashion following the November election as the S&P 500 posted a gain of 9.54% (11.96% with dividends). If you recall, 2016 started with the worst opening week in history, down -5.96%. It was a story of two distinct periods of performance. In the first half of the year defensive stocks outperformed as credit concerns, a dim growth outlook, and a Chinese currency devaluation kept risk-takers at bay. In the second half of 2016, this trend reversed and cyclical stocks massively outperformed as credit concerns abated and the growth expectations improved. Not all stock markets fared as well, as European and Chinese equities declined on the year. Finally, we experienced a significant rise in bond yields (a decline in bond prices)—of a magnitude not seen since 2013. This can be seen in the blue line in the graph below.
For in-depth analysis of the stock sectors and Morningstar Style & Cap Indexes please see the link below.
The big story of the year was the election of Donald Trump and his proposed initiatives. In summary, the Trump administration seems ready to deliver economic boost through spending, tax cuts and less regulation of certain industries. The broad strokes of his plan have been stated, however we need clarity on the finer details such as timing, priority of projects, and concrete spending details. Thus, uncertainty will exist amongst the improved growth expectations for the U.S. economy.
Rising interest rates and the stronger U.S. dollar will present challenges for certain companies. As rates rise, borrowing costs for consumers and businesses alike will begin to rise. Consumers will then have less disposable income to purchase goods and services, and businesses will have less profit. Further, a strong U.S. dollar could present headwinds for domestic companies that 1) have a high percentage of international revenue and 2) rely upon non-domestic consumers.
The U.S. economy growth outlook forecasts for 2017 are expected to be just shy of 3%. While this is short of the long-run average of 3.2%, it marks a notable improvement from our growth during recent expansion. The growth expectations are supported by the anticipated fiscal policy and rising real wages. However, risks to growth lie within reduced global trade from stressed relations, higher interest rates that may smother underlying demand, and global political instability.
Cory Nakamura CFA, CFP®
Chief Investment Strategist and Financial Advisor
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