Quarterly Market Update

Closing Out 2016 and Looking Ahead to 2017

The markets rallied for the third quarter in a row to round out a very good year for investors.  The bleak and nervous moments of February 2016 were overcome by optimism in December.  The President-Elect and his perspective on the government is giving investors cautious optimism about 2017.  Several themes generating investor interest are less regulations on corporations- especially banks, major infrastructure investments and a change in the way the government approaches the issues at hand.  The President-Elect looks to solve issues as business problems, thereby creating opportunity for the U.S. people.  This is in contrast to the current administration that seeks to mitigate opportunity issues via more comprehensive social welfare programs.  It seems that the two strategies could not be more different, but each has its own valuable perspective.  This is something that we will continue to monitor and make changes to our investment portfolios as needed.  

One condition that will not change in 2017 is volatility.  We believe volatility will be a major theme in 2017 as the President-Elect chooses to use social media, especially Twitter to communicate quickly and create change.  This is not a well-controlled medium, as the information is instantly disseminated and the intent of the message can be easily lost if not carefully worded or crafted.  Social media can be an effective way to communicate if used properly, but we believe the world has yet to adapt to this changing medium.  And while the world adapts, we are sure volatility will ensue.  Last year, there were three major events causing volatility, the initial pullback that started the year, BREXIT and the Presidential Election.  The S&P 500 Index lost more than 10% in the first six weeks of the year and finished the year up over 9%- a more than 20% move in the index.  We believe there will be more volatility, but the indexes will remain positive for 2017. 

For the first time in almost a decade, the Federal Reserve raised interest rates two times in a year. We believe that the Fed will continue to raise short term interest rates this year and subsequent years. This investment theme will likely be a three to five-year story as the Fed tries to restore short term rates back to normal levels. This is a sign that the economy is growing and economic numbers are continuing to improve.  We believe that the Fed will raise rates another two times this year with the possibility of a third, if the economy continues to improve through the third quarter.

Lastly, employment numbers are inching closer to full employment, with some wage inflation being reported.  This is good news for retailers, especially online and box retailers like Walmart, Home Depot, Target, and Lowes.  We believe consumers will continue to increase spending and be the driving force behind targeted companies in the consumer discretionary sector.  In addition, consumers are not burdened by high fuel costs as oil prices have recovered to $53 dollars a barrel and are likely to remain in a trading range of $45-$60 a barrel. This will also help to bolster consumer spending and consumption.       

As always, please call if you have any questions.

All the best and Happy New Year!