By Mickey Welcher
We have seen a very strong stock market rally in the last two months of 2016, which has turned a mediocre year into a very nice one. We’ve experienced all-time highs after Donald Trump was elected President. Where does this leave us for 2017?
Here are my three predictions for the market in the new year:
1. Corporate Earnings Guidance for 2017 Will Help Bolster The Market
Expect a small pullback in early January as investors take some of their profits from the Santa Claus/Donald Trump rallies off the table. However, the next earnings season kicks off in early January, which covers the last quarter of 2016. I expect them to be in line with analysts’ estimate because we would have heard warnings from some corporations by now if there was going to be an issue. This will be good for stocks.
The important part of these upcoming reports, though, is each company’s forward-looking guidance on revenues and profits for 2017. I would not be surprised to hear companies being optimistic about guidance due to the increased spending ideas President-elect Trump has talked about. These are things that could stimulate economic growth, which will push corporate earnings and the market higher.
2. Trump’s Ability to Fulfill Campaign Promises Is Crucial to Maintaining The Rally
The market has loved what President-elect Donald Trump has said about spending on infrastructure, keeping jobs in the U.S. and lowering taxes. The big question is where will he find the money to do all this spending? If he can’t, the market may give back all those recent lucrative gains plus some.
3. Federal Reserve Moves Could Cause Investors to Switch from Stocks to Bonds
The Federal Reserve holds a lot of power as to how much longer this rally will continue. They raised the federal funds rate by .25 percent on Dec. 14 as expected, but surprised investors by announcing that there could be three more increases next year. Normally this is good news as the move signals the belief that we’re benefiting from a strong economy. The problem, however, is many investors who bought stocks did so because their dividends were so much better than putting money in bonds with very low interest rates. The Fed’s move will have investors shifting away from stocks and going back into safer bonds.
These moves seem contradictory in many ways. While corporate earnings guidance could help the stock market maintain its rally, political realities and a Federal Reserve looking to raise rates may trigger a correction. So where does this leave investors?
For now, my advice is stay the course. The trend continues upward so there’s no immediate need to make any moves out of the market. The key will be to watch what happens in the New Year and adjust accordingly.
Stocks could sour a bit after Jan. 1 if corporate earnings or guidance is not strong, the Federal Reserve raises rates faster than anticipated or President Trump has problems with his fiscal policies. As of today, though, enjoy the ride and the holiday season!
Mickey Welcher is founder of Envestim, a low-cost financial advisory firm for anyone looking to start or manage their portfolio. He can be reached at mickey@envestim.com.
