Market Update 12.31.2016

Scott Campbell |

The U.S. stock market finished 2016 on a tear.  The market was up 3.99% for the fourth quarter and up 12.44% for the entire year. 

Things got off to a slow start in the fourth quarter as concerns about rising interest rates and the Presidential election weighed on the market.  Then, on the night of the election things got crazy.  As it became unclear who was going to win the election, futures markets dropped significantly, with the Dow futures off by almost 1,000 points!  But by morning the results had been determined and the market opened up positive and finished day positive.  And the stock market has been on a tear since, with many major indexes hitting all-time highs.  The stock market likes the idea of a pro-business President, with actual business experience, who will make starting and operating businesses much easier by reducing regulations and corporate taxes.  The reduction in corporate taxes alone will deliver a 10% to 15% net increase in profits in the S&P 500, increasing earnings and as we often reiterate – corporate earnings drive the stock market.

The Fed raised rates by a quarter point (0.25%) in December.  But the move was largely expected and the market reacted with very little movement.  The angst previously caused by the idea of the Fed raising rates has subsided as investors have been come comfortable with the idea that the Fed will raise rates at least three times in 2017. 

The economy grew at its highest rate since Q3 2014, growing in Q3 2016 at 3.5%.  However, the GDP growth slowed to 1.9% for Q4 of 2016, proving Q3 was an aberration.  But this has been the case with the economy for the last several years – it goes in fits and starts. 

The employment picture continued to hold steady and positive.  Inflation increased in the past quarter and the outlook for 2017 is for inflation to re-appear after several years of being flat and almost nonexistent.

Foreign stock markets did not fare as well in the fourth quarter.  Although several foreign stock markets did well: Russia rebounded due to the rebound in oil prices; China’s economy has stabilized and is showing signs of growth; and the UK is showing no signs of trouble from Brexit; a surging U.S. dollar wiped out all the gains.

The rally in the stock market, combined with the rate hike at the end of the year and expectations for rising inflation sunk the bond market during the quarter.