2016 was one of the most unpredictable year (from an economic and political standpoint).
For this year it’s been predicted that the bull market will not end. Most of the Americans companies are expecting to gain benefit from Trump’s promises to reduce taxes and ease regulations.
This will result in increasing the earnings growth for the large companies. 2017 is expected to be least certain with higher than usual risks and a limited set of outcomes. In 2017, there will be a potential for big market swings.
Risk and reward will be more imperative than the absolute target. The year 2017 could be a binary year in which the market falls to 1600 in the bar case and in the bull case to 2700. The risks for equities are likely to be higher than last year.
Here are some predictions for 2017:
Caution is Necessary
It is argued the election outcome has changed the game for better. Cutting back on taxes, deregulation, and infrastructure investment program, all leads to the pro-growth scenario.
The rise in bond yields is positive. This indicates the higher returns to capital and end of deflation for the inflation hedges like energy (XLE), financial l (XLF) and industrial (XLI). The earnings expectation are strengthening for these sectors. Still, caution is warranted as the markets are betting big on the best possible developments. It is unclear what form of new policies will Trump take and how much Trump’s policies will be accepted by Congress.
OPEC has agreed to reduce the production level in order to cut down the global supply surplus. For two years the surplus had a negative impact on the prices of oil. It is reported that Iraq has reduced its total oil exports by 170,000 bpd.
Moreover, the oil prices rose due to the increase in Chinese car sales. As a result of this, there has been an increase in the fuel consumption. In 2017, the net crude imports are expected to rise to 396 million tons. The increase in oil prices had a positive effect on the energy shares. Amongst the S&P 500, the Energy Select Sector SPDR (XLE) improved by 1.1%.
According to Trump, more control is required on prices of drugs. The profitability of the health sector will be decreased. The aftermath of the remark of Trump was a fall in the stocks of healthcare. Some of the main holdings such as Pfizer Inc. and Gilead Sciences Inc. decreased by 1.8% and 1.7%.
Positive for US Stocks
According to investors, Trump’s policies on tax and deregulation will lead to improvement in growth. So in 2017, it is expected the earnings will grow. The current consensus expectation is that earning per share for the S&P 500 will grow 12% in 2017.
Furthermore, the Banks have rallied on higher interest rates. Steel stocks (SLX) experienced a rise. It is expected that the Trumps’ administration will limit the cheap imports from China and South Korea.
On the other hand, the high-yielding and stable stocks of consumer staples and utility sectors have under performed. In case the growth increase rapidly in 2017, the Fed will have to be more assertive with the pace of interest rate hikes.
The low rate of interest in other countries and higher interest rate in the US will lead to a strong currency of US. As a result of this, the US dollar will pressure overseas profit. It will create difficulties for developing market economies.
The events of this year had inserted huge amounts of uncertainty into the economy. It is expected there will be massive changes to US policies on China. According to the researchers at Pimco, the world has arrived in the completely uncertain, stable but not secure situation. The prospect of high tension with Russia or China could bring down the markets as Trump as threatened to levy tariffs.
The Current State of Global Economy
The end of the beginning is the suitable metaphor to describe the current state of the global economy. The US is emerging from the first phase of the business cycle and boarding on the second phase. The second phase, the sustainable expansion will not only be beneficial for the US but for the global economy.
The Trump’s stance on trade can have disappointing implications. The imposition of tariffs on Chinese imports can have unsatisfactory effect for the US, China, and emerging markets.
As far as China is concerned, faster nominal growth with the limited fiscal stimulus is expected. A stable economy, strong credit and money supply and easing deflationary pressures are factors that will be helpful in 2017.
India’s growth rate has been down from 7.6 to 6.6 due to temporary negative consumption shock “ Demonetisation” , which made investors and new uan registration members anxious.
The stocks of US were good for 7 years and still is continued to do so. It is forecasted that the stock price will be higher in the first half of 2017. A corporate credit will be attractive even if yields rise a bit.
Some Difficulties for 2017
Investors must expect returns to be in the range from 6% to 8% for equities for the foreseeable future. There can be short-term catalysts from a reduction in tax and infrastructure spending program. But this will result in improving the returns. The fiscal stimulus will be less impactful when approaching for full employment.
The fiscal stimulus might help stock investors in 2017, the fixed-income investors will find total returns difficult. The outcome of this stimulus will increase in inflation. Moreover, the rate on the 10-year Treasury note has increased since the election. It caused the bond prices to fall. This is most of the investors have not seen in many years. Thus, the reaction to this situation is uncertain.
Therefore, energy shares were the biggest gainers because of increase in oil prices. The oil prices moved upwards due to OPEC’s decision to cut back the production levels. They anticipated huge demand from China. The stock market seems to be benefiting front the Trumps’ policies. Rising inflation, higher interest rates, an increase in energy prices are possible risks to the economy.