Happy New Year!  2016 may have ended with a whimper, but 2017 has started out with a bang.  Will the momentum of 2016 carry over into 2017?

The Big Picture

After a rough start, with stock indices losing ground in January, 2016 surprised many investors.  With election year uncertainty and continued global unrest, investors erred on the side of caution and moved to defensive positions.  The 10-year treasury benefited from flight-to-quality buying, pushing the yield down to 1.32%.

The economic backdrop remained benign, with inflation subdued and well below the Federal Reserve’s target of 2%.  Job creation remained steady with the unemployment rate falling below 5%.  Economic growth, as measured by GDP, was a modest 1.4% for the second quarter.  However, housing prices continued to climb and consumer confidence rose to the highest level since 2007.

International markets were briefly roiled by the unexpected Brexit vote in July and, in the wake of that vote, investors became less risk averse, pushing the Dow Jones Industrial Average, the S&P 500 index and the NASDAQ composite to new record highs in August.

Renewed optimism about the U.S. economy coupled with lessening fears of a slowdown in global growth, steady Federal Reserve monetary policy and a rebound in crude oil prices buoyed equity prices.  Small cap stocks outperformed large caps and the NASDAQ notched a record high close in early September.

Markets marked time in October as the 2016 elections loomed large.  Donald Trump’s victory over Hillary Clinton unleashed the animal spirits on Wall Street, propelling the major market indices to successive new record high closes.  December 8, 2016 saw all five major indices – the Dow Jones Industrial Average, the Dow Transports, the S&P 500 index, the NASDAQ Composite and the Russell 200 index – all hit record intra-day highs as well as record closing highs, the first time since March 16, 1988!

I, Investor

Who needs a Santa Claus rally when you have Trump?  In anticipation of tax cuts and less regulation, investors flocked to equities in droves, especially financials.  The expected dissolution of the Consumer Finance Protection Bureau and the repeal of Dodd-Frank will destroy the shackles placed on the sector in the wake of the 2008 financial meltdown.

Republicans control the House and the Senate and are expected to rubber stamp whatever Trump proposes.  It will be difficult for the Democratic party to push back.  Hence, the first trading day of 2017 saw a surge in equity prices on the hopes of a pickup in unfettered economic growth.  The danger in this outlook is that prices get too far ahead of themselves.  Don’t be surprised to see a pullback, and on that pullback, those that missed the train are bound to jump on.  Fasten your seat belts.  It;s going to be an interesting year.

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