ECONOMIC AND STOCK MARKET COMMENTARY

Homebuilding continues to give a reasonably good account of itself, with housing starts at their highest level in nine years, after advancing at their fastest pace in six quarters in last year’s final period. Even so, building activity is only about half of what it was at the peak of the last housing up cycle. Also, building permits—a more forward-looking barometer—just held steady in December, but at a solid recovery level.

Trends favor a continued resilient housing market, as housing inventories remain quite low; a record-setting stock market is putting more wealth in the hands of potential buyers; and rising home prices are making housing a good investment once again. So, we would expect construction activity and housing sales (which recently hit a 10-year high in the resale category) to remain near recovery highs for some time yet.

The economic outlook remains generally positive. Recent surveys affirming that most business and consumer sectors continue to hold their own, with industrial production and factory use doing especially well, as we move through the early weeks of 2017. That said, Federal Reserve Chair Janet Yellen’s recent comments that she does not expect economic growth “to pick up markedly in the near term” suggest that growth likely will be capped at 2.0%-2.5% this year.

Meanwhile, a new era is under way in Washington, and one that could lead to firming growth in the next year or so, assuming the new President’s oft-stated plans for tax cuts, relaxed regulations, and spending increases are successfully implemented. One byproduct of accelerating growth could be higher inflation, a development that likely would advance the timetable for the Fed’s anticipated interest rate hikes.

Earnings season is in full swing, and most companies are continuing to do quite well, with many financial, industrial, and technology names exceeding profit forecasts. That healthy showing is helping a richly capitalized stock market press even higher.

The Dow Jones Industrial Average finally moved above 20,000 as we went to press, following a series of failed attempts to do so earlier in the year. Records also were set by several other indexes, as Wall Street continued to see the economic glass as half full.

Conclusion: The case for optimism on the economy is still compelling. However, with valuations now rich, disappointments out of Washington, on earnings, or from the Fed, could be dealt with harshly.

Source: Valueline.com