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theodore M I R A L D I mpa ... editor, publisher, writer
Wednesday, January 25, 2017
Trump TIPS DOW to 20K
After a brief hiatus, the Dow Jones Industrial Average resumed its march toward 20000, crossing the elusive milestone on Wednesday as President Donald Trump demonstrates his seriousness about fulfilling campaign promises of lower taxes, less regulation, and more fiscal spending.
Financial-sector stocks have also been a key element in the post-election rally that has led not only to Dow 20K, but fresh records on both the S&P 500 and the Nasdaq Composite indexes. While action in the sector cooled in recent weeks, improving global economic growth and consolidation in the U.S. dollar/U.S. Treasury yields has been a support for risk assets, said Dennis DeBusschere, senior managing director at Evercore ISI.
“A weak U.S. dollar and an accommodative Fed are in the new administration’s best interest and as long as a significant policy ‘mistake’ is avoided, risk assets should move higher as economic growth improves,” he said.
Trump’s fiscal policies, though, are just one piece of the 2017 market puzzle. With expectations of added stimulus from Washington, policymakers down the road from the White House at the Federal Reserve are calculating the pace at which the short-term federal funds rate will need to increase to keep up with a growing economy while also not allowing it to overheat. The Fed in December said it expects three 0.25 percentage point rate increases this year, which it believes will allow inflation to move closer to the 2% target while the job-creation rate remains steady.
In that environment, investors may stand to benefit from putting more weight on cyclical stocks including financials, energy, consumer discretionary and real estate, rather than in defensive sectors that include health care and utilities.
“What we’re likely to see in 2017 is a resumption of an earnings-driven market where there’s tangible earnings growth. That’s going to be essential to sector performance,” said U.S. Bank Private Client Group Chief Investment Officer Bill Northey.
With fourth-quarter earnings season underway, he explained energy stocks could see positive yearly earnings thanks to the rise in benchmark oil prices over the last year, while the landscape for financial services stocks has also improved thanks in part to the outlook for a relaxation of the onerous Dodd-Frank financial reform law.
“There are some tangible elements likely to transpire in 2017 that warrant the kind of reaction we saw in 2016, but broadly speaking, we saw index levels run beyond what the underlying fundamentals were doing,” Northey added.
Though the overall economy is on solid footing, headwinds for both equities and the economy are beginning to emerge warned Ameriprise Chief Market Strategist David Joy.
“[We’re seeing warnings that] higher rates are a drag on housing, that the stronger dollar is a drag on exports and that wage gains are being eroded by rising inflation,” he explained while also outlining worries that a lack of skilled workers threatens to stand in the way of the ongoing recovery.
Still, it’s also worth looking at 2017 in a way that detaches the economy from company-to-company performance as investors weigh the prospect of new fiscal policies, said Ralph Bassett, head of North American Equities at Aberdeen Asset Management.
“Lower tax rates are a great thing for domestic companies that we’ll see a greater benefit from. While our economy is very much domestic and service-related, companies are headquartered here and generate jobs here. They are impacted by our trade policy, which is the biggest question mark through the new year,” he said.