ECONOMIC AND STOCK MARKET COMMENTARY

The old year ended with its share of hits and misses for the economy. On point, there was an upward revision, from 3.2% to 3.5%, in gross domestic product growth during the third quarter, as well as gains in the sale of both new and existing homes, a solid increase in consumer confidence, and a small rise in consumer spending. On the other hand, the latest month saw a decline in housing starts, a sluggish reading on building permits, a setback for durable goods orders, and flattish results in personal income. Given this checkered pattern …

We now doubt whether the third quarter’s strength was duplicated in the just ended three months. In our opinion, the ups and downs cited above, along with the presumptive moderation in inventories (the third quarter was helped by inventory stockpiling) and a slowing in export demand likely kept GDP growth in a more moderate 2.0%-2.5% range in the just-concluded period. That still would be a respectable performance, especially relative to the first half of 2016 when assorted ills held growth to just about 1%.  Meantime …

We should see progress in 2017, when the fundamentals will likely be decent enough, particularly if lower tax rates are added to the equation, to keep growth securely over 2% for the full year. That said, we think it could be 12 to 18 months before the likely infrastructure boost is factored into the growth outlook.

Still, we face some unknowns as the new year gets under way. A prominent one would be the expected tab for the incoming Administration’s suggested tax and spending efforts. Such endeavors would figure to aid growth in 2018 and 2019, but also raise budget and debt issues, which likely would draw the attention of some in Congress.

The bulls face some challenges, as well. These are highlighted by a price-earnings ratio which, after a vigorous year-end rally, is closing in on 20—an elevated level that would seem to discount much of what could go right in 2017. Also of note are questions about the Federal Reserve and its likely shift to a tighter monetary stance, and unknowns on international trade, oil prices, and global relations.

Conclusion: Clearly, there are potential rewards out there. However, there also are rising valuation risks.

Source: Valueline.com