Will 2016 Stock Gains Continue in 2017?


2016 is in the record books and given the dreadful start of the year for US stock markets (in February, all major indexes corrected, falling more than 10 percent from the end of 2015,) the closing numbers were impressive. Total return results for 2016, which includes price appreciation and dividends showed the Dow up 16.5 percent and the S&P 500 ahead by 12 percent. The 2016 action occurred in three distinct phases:

  1. January to middle of February: Fear of recession (S&P 500 -10% from Dec 2015 highs)
  2. Mid February to Election Day: Recovery and slow growth (thru 11/4, S&P 500 +2%)
  3. November 9th – December 31: Post election rally (S&P 500 +9.5%)

The end of year rally was fueled by President-elect Trump’s pledges to reinvigorate the economy with a mix of fiscal policy changes, which include: A public-private infrastructure spending plan; corporate and personal tax reform; and the loosening of regulations across a number of sectors, including banking and energy.

The combination of these three potential initiatives could boost growth, as the economy enters the eighth year of the expansion. (In the first seven years, annual growth ranged from 1.6 to 2.6 percent.) Presuming that some form of each idea comes to fruition, most economists have penciled in growth of 2.5 to 3 percent for 2017, with two asterisks.

The first is that the plans could spark inflation, which could prompt the Fed to raise interest rates faster than anticipated and could snuff out some of the growth. The second asterisk is more dangerous—if Trump’s trade rhetoric were to escalate into a full-blown trade war, the economy would suffer dramatic negative effects, potentially leading to a toxic combination of a recession and inflation.

What lies ahead for the economy and markets in 2017 will be directly linked to the details of the broad themes that President-elect Trump and the Republican Congress are able to enact.

MARKETS: While stocks grabbed headlines, bond investors endured a wild ride in 2016. After starting the year at 2.273 percent, yields of the benchmark 10-year Treasury tumbled to 1.366% in early July-the lowest yield on record. Then in Q4, prices fell and yields increased by the largest amount in more than a decade. The total return from the so-called safe haven was DOWN 0.2 percent on the year.

  • DJIA: 19,762, up 13.4% (The blue chip index topped 19,000 on Nov 22nd and made a run late-year run at 20,000, but came up 13 points shy of the next round number milestone.)
  • S&P 500: 2238, up 9.5% YTD
  • NASDAQ: 5383, up 7.5% YTD
  • Russell 2000: 1357, up 19.5% YTD
  • 10-Year Treasury yield: 2.446%, down 0.2% (including interest payments)
  • February Crude: $53.72, up 45% on year, the best annual gains since 2009. Early year recession worries caused crude oil to bottom out at $26.21 a barrel, the lowest level since 2003. December 31, increasing demand and an agreement by OPEC to curtail production, propelled the commodity higher.
  • February Gold: $1,151.70, up 8.5% on year (snapped a 3-year losing streak)
  • AAA Nat'l avg. for gallon of reg. gas: $2.33 (from $2.00 a year ago)

THE WEEK AHEAD: The last employment report of the year is due this week. It is expected that the economy added 175,000 jobs in December and the unemployment rate will edge up to 4.7 percent from 4.6 percent. For 2016, job growth will likely be about 2.2 million, down from 2.7 million in 2015 and just over 3 million in 2014, the peak year for this cycle.

Mon 1/2: Markets Closed

Tues 1/3:

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing

10:00 Construction Spending

Weds 1/4:

Light vehicle sales for December

8:15 ADP Private Sector Employment

2:00 FOMC Minutes

Thurs 1/5:

10:00 ISM non-Manufacturing Index

Friday 1/6:

8:30 Employment Report

8:30 International Trade

10:00 Factory Orders