The fourth quarter of 2016 capped the end to a solid year for US equity returns. The quarter started off rocky with the S&P 500 Index falling each day from October 25 to November 4, the most consecutive losing sessions since 1980 as election uncertainty ran high. The market then rallied strongly into year-end on the back of strong economic data and optimism regarding the upcoming Republican administration. As we look into 2017, these are a few key topics and events we will be focusing on:
- US Politics: As President Trump takes the oath of office on January 20, the market will be looking for signs and details surrounding his policy agenda. Most important for investors is US corporate tax reform. If the corporate tax rate is lowered without other offsetting changes, it could add significantly to US corporate earnings. Other key topics will be healthcare reform, deregulation and infrastructure spending.
- Global Economic Data: US economic data has been quite strong in the second half of 2016, with most metrics and surveys pointing to solid economic growth and a labor market nearing full employment. Global indicators have also been encouraging, most importantly in China and Europe. Whether these positive trends persist will be very important to market performance in 2017.
- Global Politics: 2017 will see key elections in France (April/May), Italy (June) and Germany (August-October), as well as the potential start of official Brexit negotiations (expected in March). Given the potential negative fallout of a EU/Eurozone collapse, these events will be followed closely by the market. Elsewhere, China’s 19th National Congress will take place in the fall of 2017 to set the country’s political path for the next five years, and European sanctions against Russia are due to expire in June.
- Global Central Bank Policy: While interest rates remain very low and global central bank policy remains accommodative at the moment, there are signs that things may slowly start returning to normal. The Federal Reserve signaled three rate increases for 2017 in its most recent forecast, and the European Central Bank recently extended its bond purchase program through December 2017, but at a reduced rate. Investors should welcome this slow policy normalization path as it signals confidence in the economy and gives central banks more tools to use during the next recession.
- International Relations: There are several global situations that investors will be monitoring closely in 2017. Chief among these currently is North Korea’s nuclear missile ambitions, which can affect not only US security and that of our Asian allies, but may also play a big role in US/China relations. China is seen as perhaps the only country able to peacefully influence North Korea, and this may end up affecting how hard of a line President Trump takes with Chinese trade policy.