ECONOMIC AND STOCK MARKET COMMENTARY

Expectations are high for the U.S. economy as we begin 2017. A strong showing by the stock market and surging optimism among both businesses and consumers form the basis for what many expect will be a much better year for the economy. This likely improvement would follow an undistinguished 2016, in which growth probably fell short of 2%.

We caution, though, that there may be a lag between improving sentiment and actual gains for the economy. In truth, rising optimism is critical, as the public and businesses often spend more when confidence is on the rise. However, the rationale for this increasing confidence (mostly the forecast that the new administration will cut taxes, roll back regulations, and spend aggressively, thus creating new jobs, greater productivity, and faster growth), albeit perhaps sound, should not suggest that things will happen overnight. They will not. In fact, it may be 2018 before we see somewhat better levels of household spending and overall GDP growth. In all, even this modestly brighter view assumes that Congress will be fully on board.

Even so, 2017 should be a better year. The pickup in sentiment, the rise in wealth created by the stock market gains, and the relatively strong job creation levels all suggest that the new year will get off to a faster start than did 2016. Back then, assorted ills (led ominously by lower energy-sector investment and a noted drawdown in inventories) kept growth to about 1% in the first half. Absent those early pressures (and a strong recent showing in the manufacturing sector is most encouraging), GDP may rise by close to 2.5% in 2017.

There probably will be the usual unsettling issues abroad. Not only could oil be vulnerable to pricing pressures if OPEC’s output curbs fail to take hold, but the recent sanctions placed on Russia, if sustained, would create the kind of tensions not seen since the Cold War. In all …

The outlook for the stock market is mixed. A more positive inventory cycle and a recovery in energy-sector spending and manufacturing probably will help lift the economy and investor spirits. But elevated valuations and rising interest rates should act as counterweights. Therefore …

Conclusion: It could be a bumpy ride on the road to higher stock prices.

Source: Valueline.com