ECONOMIC AND STOCK MARKET COMMENTARY

The economy moves into the homestretch of 2016 in fairly good shape. True, we are unlikely to see a repeat of the 2.9% rate of gain tallied in the third quarter, as the recent lift from inventory stockpiling may not be sustainable. (Inventory investment, in fact, could be a neutral factor in the current three months, while exports, a boon to growth last period, likely will be a drag this quarter.) Still, recent reports are sufficiently supportive in the areas of job growth, wages, and retail sales (which jumped by 0.8% in October) for GDP to move ahead by 2.0%-2.5% this period.

Economic stability will be a key to the markets in 2017. However, as 2016 showed, with its poor first half, such goals often have been elusive due to weather events or surprise inventory swings. These caveats aside, the up cycle should be more balanced in the new year, with consumer spending, home building, business investment, and government spending all aiding growth, while inventories should be neutral. This is likely to keep GDP grow thin a 2.0%-2.5% range.

The election probably will bring policy changes, in time. The most notable of these potential moves may include increased fiscal spending (particularly on the infrastructure), new tax cuts, rollbacks of regulations, and a tougher stance on free trade. All of this assumes these will be the priorities among President-elect Trump’s campaign pledges, and that Congress will go along with these initiatives—including a resultant rise in government spending.

The Federal Reserve is likely to raise interest rates next month, as the bank continues to suggest that the case for a rise in borrowing costs is strengthening. Such a possible move might then be followed by at least two rate increases in 2017—in particular if the likely rise in fiscal spending boosts GDP growth. That is a potential scenario that would seem to be reflected in the recent surge in bond yields.

Wall Street seems to be taking all of this in stride, with the Dow Jones Industrial Average rising to a record following the election on hopes for an increase in stimulus spending.

Conclusion: The equity market’s fundamentals are still sound, but the higher price levels signal the need for some investor caution at this time.

Source:  Valueline.com