Daily Archives: December 28, 2016

Heads Up!

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The U.S. stock market has jumped since the November 8th election. Many investors are asking if now is a good time to “take profits” and sit on the side lines to wait to see what happens. But this strategy is a form of market timing.  If there is one thing we have learned from 2016 is that it is exceptionally difficult to time the market. Instead of market timing, let’s identify and track the 4 initiatives the U.S. stock market is speculating will be successfully accomplished early in the Trump administration.

If Trump administration successfully accomplishes the 4 initiatives, then the stock market has speculated correctly and could trend to higher and higher levels over the next 4 to 5 years. However, if his administration is unsuccessful in accomplishing the 4 initiatives, then stock market investors may find themselves disappointed with a correction sending shares values back down to levels witnessed prior to the November 8th election.

The outcome of the 4 initiatives have a substantial impact on the factors in the “Heat Map”

The 4 Trump administration initiatives upon which the stock market is speculating are:

  1. Tax cuts and tax reforms benefiting most individuals and businesses.
  2. Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years.
  3. Affordable Care Act amendment, reform or reorganization.
  4. Roll back of government regulations and Executive Orders considered to be difficult for businesses.

As the action happens in Washington on these 4 initiatives, don’t be surprised if the beginning of 2017 is wilder than the end of 2016.

We will report in future issues on the progress on each initiative. 

The “Heat Map”

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Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: This grade is A- (very favorable). Favorable activity in the housing market continues to support growth in the level of spending. This category’s grade will improve if and when the Trump legislation is passed.

THE FED AND ITS POLICIES: This factor is rated C-. The FED stated it would take a wait and see attitude toward the economic impact of legislation the Trump Administrations has proposed. Some experts believe the FED could raise rates at a faster pace if and when the Trump proposed legislation is passed into law. The FED is in the process of turning from a friend to the stock market to an anchor weighing down profitability, reducing valuations, and constraining growth.

BUSINESS PROFITABILITY: This factor’s grade is rated a B- (above average). Trump’s goal is a 4% growth rate for the U.S. economy. This will increase business profits significantly.

OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 3. These risks deserve our ongoing attention.

The Numbers

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Last week, U.S. Stocks, Foreign Stocks and Bonds all increased. During the last 12 months, STOCKS outperformed BONDS.

Returns through 12-23-2016

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds- BarCap Aggregate Index

 .3

2.0

2.1

2.7

2.3

4.3

US Stocks-Standard & Poor’s 500

 .3

13.4

12.5

9.5

14.8

7.0

Foreign Stocks- MS EAFE Developed Countries

 .1

.3

.1

-1.7

6.5

.7

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.

The Markets This Week

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Stocks inched higher this week, but investors are still waiting for the Dow Jones Industrial Average to breach 20,000.

Yes, it almost got there. Last Tuesday, the Dow came within 13 points of that elusive round number, but it finished the week just short at 19,933.81, up 90.40 points, or 0.5%—marking its seventh straight week of gains. The Standard & Poor’s 500 index to 2263.79, while the Nasdaq Composite rose 0.5%, to 5462.69.

It was probably too much to expect fireworks from the Dow this week. With the long Christmas weekend looming, trading all but dried up. On Friday, the Dow traded in a range of just 35.09 points, the smallest since Dec. 30, 2013, and the rest of the week wasn’t much more exciting. On Friday, just 3.98 billion shares traded hands, the lightest volume on a full trading day since Dec. 26, 2014.

It’s also perfectly reasonable—and not just because most of us were looking ahead to the holidays. The Dow has gained nearly 10% since the end of October, more than double its 4.1% rise during the first nine months of the year, spurred in part by Donald J. Trump’s victory in the 2016 U.S. presidential election. The pause “makes some sense given how much the market has run,” says Jason Pride, director of investment strategy at Glenmede. “But 20,000 is a clearable number.”

Eminently so, and don’t be surprised if it happens as early as next week. Historically, the last week of the year has been a nice gift to investors. Since 1928, the S&P 500 has gained 1.14 percentage points during the last five trading days of the year, notes Cornerstone Macro technical analyst Carter Worth, well above the average 0.14-point rise for all five-day periods. “The odds are high” that the last days of the year will “play out well,” he observes. And if they do, we won’t have to wait for 2017 to witness Dow 20,000.

(Source: Barrons Online)