ECONOMIC AND STOCK MARKET COMMENTARY

The economic pieces appear to be falling into place as the old year winds down. On point, retail and housing data remain largely positive, while consumer confidence is gaining strongly, along with stock prices and home values. Thus, it is not hard to envision the economy, which grew by an upwardly revised 3.2% in the third quarter, gaining 2.5%, or more, in the current period. Such a solid advance would enable an up-and-down 2016 to end on an encouraging note.

Christmas spending is likely to be fairly strong, and this expectation is one of the reasons for our evolving optimism on the final three months of 2016. To be sure, the so-called Black Friday event—which often begins on Thanksgiving Day—and which in 2016 is likely to have been decent, but not exceptional, is now less of a gauge than it was, as a number of retailers start their sales in early November. What’s more, many shoppers now do their buying online, thereby avoiding the in-store rush. Most signs point to a good online showing this year.

There also are issues that will need to be resolved once the new year begins. Most notable in this regard will be the likely changes in tax policies, the magnitude of the suggested increases in infrastructure spending the new Administration will pursue, and how much of this talked about program may be enacted by a Congress that also is likely to focus on keeping spending under control.

Meanwhile, interest rates will need to be watched, most notably the 10-year Treasury note. The yield on this fixed-income vehicle, which is used in setting home mortgage rates, has gone from less than 1.5% during the summer to just under 2.5% in the days after Thanksgiving. This run-up in yields reflects forecasts of higher infrastructure spending in 2017 and 2018 and raises the likelihood of a Federal Reserve-initiated interest rate hike this month. The jump in yields, meantime, may prove problematic for stocks, if we head much above 2.5%.

For now, however, the bulls have been getting the benefit of the doubt, as the key indexes have risen to a succession of all-time highs in this post-election run of optimism. We caution, though, that red flags will be raised if rates continue rising or if OPEC can make a deal stick that would produce the output curbs needed to drive oil prices notably higher.

Conclusion: The fundamentals are largely supportive, but interest rates and oil prices will bear watching.

Source: Valueline.com