Year End Outlook

December 16, 2016

Since November 9, the stock market has rallied about 5%. I am comfortable with this rally and I am cautiously optimistic that it can continue. First, as we have discussed all year, the stock market often moves higher after a Presidential election because the anticipation is over. Even though our election result may have been surprising to many, investors reacted with a sigh that one source of uncertainty had passed. Since President-elect Trump has very different priorities than may have been anticipated, the market rally started even stronger as fast-money traders quickly moved out of some sectors and rotated into others they speculated would benefit from new policy priorities. Such rotation continues and is still nothing more than speculation.

More importantly, the election coincided with the end of third quarter corporate earnings reports and a decisive end to the mid-cycle slowdown. The current stock market rally reflects confidence that future earnings will be returning to growth. Keep in mind that the stock market is currently making a new high only after more than 24 months retreating from its previous peak. Even still, the strength is not across the board as the averages suggest; formerly weak sectors such as materials and industrials are rallying and reliably strong sectors such as consumer goods and healthcare are retreating, even offering buying opportunities.

Finally, our Federal Reserve has declared victory with its latest move in interest rates. Though, the market initially sold off on the announcement, it bounced back the next day as a rising Fed Funds rate sparked by stronger economic growth is usually supportive of the stock market and signals optimism in the future.

We are entering a new post-financial crisis era as the now predictable policy responses of the past eight years are likely to change with new leadership in our government. We do not know how this era will unfold. It may bring positive economic growth, a new recession or the next financial crisis. We may have down days or even weeks in the near term, but for now, we invest for the positive economic potential we see in 2017.