First Quarter 2017 Market Update
The market continued its strong post-election rally into the first quarter of 2017. Even though the markets have delivered impressive returns, we believe there are many reasons why the rally will continue through 2017. However, we have some concerns, e.g. the President leading the U.S. into a trade war or continuing to push an isolationist agenda. Overall, we believe the growth in the economy, good employment numbers, and a political platform based on lower regulation and tax reform outweighs the potential risks and will lead the markets higher.
The most compelling argument for further market gain is continual economic growth. The economy started to gain traction and experience sustainable growth approximately 18 months ago. The U.S. is at or near full employment and the workforce is starting to drive wage inflation. As wage inflation continues, we believe that American consumers will increase their spending. This will drive retail stocks, consumer discretionary companies, and home improvement stores like Home Depot and Lowes, as owners tend to renovate their homes rather than purchase new ones in a rising interest rate environment.
In addition to an improving economy, the President has outlined a platform of lower regulation and an infrastructure improvement bill. The lowering of regulation, especially rolling back parts of the Dodd-Frank Bill will help money centers with lending approvals. In addition, we believe the need for infrastructure improvement is large enough that it should be endorsed by both sides of the aisle in Congress. New Infrastructure spending should benefit companies like Caterpillar, Deere, and engineering and supply companies in construction. These industries should continue to grow as spending accelerates.
The Federal Reserve has deferred raising interest rates to normal levels despite improving economic data, partially from concern that foreign economic issues would hamper U.S. economic growth. However, foreign economies look to be in a bottoming process and international “green spots” of growth are emerging. Because of the positive signs in U.S. economic growth and diminished international risk, the Fed has hinted at two potential interest rate hikes this year. High short term interest rates will be very positive developments for financial institutions and banks.
The failure of the Republicans to reach consensus within their own party in the effort to pass health care reform is an interesting development. We believe this could be potentially positive as it is evidence that the checks and balances of our government are working as they should. No majority party should be able to pass laws unhampered by opposing views, whether by other parties or members of its own. This latest impasse could make the many factions in Congress and the Senate work together toward a middle ground - unless they are resigned to a perpetual standoff.
Lastly, as we look to April, taxes will be a leading topic throughout the month. The President has indicated that he wants to pursue corporate and personal tax reform. Again, this could help improve economic growth as companies will look to re-patriate foreign earnings at a more competitive global rate than the current corporate tax rate. In addition, if some relief is implemented on personal tax rates, consumers will have more discretionary funds, which will lead to improved corporate earnings. This will not be an easy process nor without negotiations, as our national debt continues to grow to unprecedented levels. However, if the economy continues to show improvement, the national debt should become more manageable over time, mirroring the accumulated debt burden of the early 1990s that culminated with debt reductions into the late 1990s.
If you have any questions, please don't hesitate to reach out to us. We look forward to hearing from you.