In the past eight years, pundits have suggested a bear market after a 10% correction but each time, the market has bounced back to new highs. One example occurred In 2011, when the S&P 500 fell by 19.4% from April 29th to October 3rd. I believe the Q/3/2015 correction was no different. Like many others on Wall Street, I was surprised that the recent highs would be achieved on the heels of the Trump election victory and be sustained leading up to the President Elect’s inauguration on January 20th, 2017.
There’s no real definition of a bear market, or a bull market, for that matter. Most pundits use the rule-of-thumb that a bear market is a 20% drop from a prior peak. However, in 1962 this happened in the midst of a long running rise in stock prices that went on until 1966. So, I don't know what gives credence to a Bear’s shadow or growling until it’s so close that you can’t ignore it. The client intra-day discussions pick-up.
That still leaves several other 20% market declines in 1957, 1970, 1973-74, 1980, 1981-82, 1990, 2000-02, and 2007-09. But each of these was correlated with recession and a U.S. recession anytime soon is extremely unlikely.
Fed monetary policy is accommodative and will remain that way even though the Fed expressed concern over faster economic growth according to their recent minutes from their December, 2016 meeting and raised the short term Fed funds rate for only the second time since 2008. Fed officials see three rate increases in 2017, based on the aggregate of their economic projections from December’s meeting, while market participants expect only two, according to the CME Group's Fed fund watch tool.
It appears that fiscal reform and tax relief is on the near horizon, Trade policy may not continue to move, at least gradually, in a direction of lower barriers to international trade. In fact, A Republican proposal aimed at cutting tax rates and keeping jobs in the U.S. risks whacking the earnings of big U.S. retailers by driving up the cost of imported clothes, furniture and other goods. The federal government could certainly and will probably find ways under the Trump administration to spend less and reform entitlements, however, government is not growing as quickly as it did in the prior decade. In the next year or so, we may see entitlement reforms that reduce long-term spending commitments in Obamacare and Medicaid as well as reductions in non-defense "discretionary" spending. Back in the 1980s, President Reagan not only cut taxes but cut spending relative to GDP as well. President Clinton also cut spending. By contrast, spending increased during the presidencies of both Bushes and under President Obama as well.
President Trump inherits a jobs growth cycle which is steady - albeit with a surprise in September - 142k jobs versus a higher consensus and 156,000 new jobs in the final month of 2016. The highlight in the latest jobs report for December, 2016 was that worker pay rose at the fastest pace since the Great Recession.
Moreover, banks and private equity firms are better capitalized than they’ve been for years, corporate balance sheets are loaded with cash, and households’ financial obligations are hovering near the smallest share of after-tax income since the early 1980s. Meanwhile, as much as home building has revived the past few years, it still has further to go. In places like Miami and Manhattan, there’s a glut of luxury apartments, however this is just not a precursor for recession. And, look at auto sales which have enjoyed a positive Fall season and December where year-end and holiday promotions induced deals at many dealerships.
Overall, I caution investors about slowing global GDP, and managing downside risk. I think that 2017 appears positive for equites (financials, tech, homebuilders, airlines, auto manufacturing, materials and industrials). I'm more cautious about health care, biotech, consumer discretionary and emerging markets. For bonds, I have a positive view of corporates and municipals. High yield corporate bonds, the leader in 2016 returning 17% may not offer a repeat performance. High yield municipals look attractive to me.
When BREXIT occurred last June, I forecast the advent of the Trump age and the populism which took hold and spread across the pond to our shores. What I didn't expect was the gift the financial markets would bestow upon investor's in the final two months of 2016 after the Trump victory. Raise a glass of champagne or a mimosa to the new year and spread your cream cheese on the bagels - or in my case the low calorie lox spread - after all it's the new year and I have to watch my diet. Besides, there’s a New Yorker in the White House and he has to watch his too while he tweets.
*Historical Statistics or figures provided by The Wall Street Journal - The U.S. Department of Labor, Bureau of Labor Statistics and The S&P 500 Index - S&P Dow Jones Indices LLC, a division of S&P Global for the following years: 1957, 1970, 1973-74, 1980, 1981-82, 1990, 2000-02, and 2007-09.
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