What Investors Should Celebrate in 2017
Investors had plenty to celebrate in 2016.
I’m expecting an encore this year. And there are good reasons to believe we’ll get one.
Although the mainstream media loves to accentuate the bad news - war, terrorism, crime, corruption, etc. - there is plenty of good news to appreciate as we kick off the new year.
The U.S. job market ended 2016 on solid footing. Growth in nonfarm payrolls averaged 180,000 a month through November. Initial jobless claims have now been below 300,000 for 95 consecutive weeks, the longest streak since 1970.
A monthly survey by the Equipment Leasing & Finance Foundation, which represents the $1 trillion equipment-leasing industry, found that business confidence rose in December, registering the biggest month-over-month increase in nearly six years.
The housing bust continues to fade in the rearview mirror. Average U.S. home prices rose 5.6% in the 12 months through November. Prices set a record high in November, stoking optimism for a sustained expansion. (Adjusted for inflation, however, home prices are still 16% below the peak in 2006.)
The dollar had another gangbuster year, hitting a 14-year high against a basket of major currencies and a 31-year high against the pound.
Pessimists will tell you that this is a bad thing, since it crimps the profits of U.S. multinationals. (Notice how they claimed that a weak dollar was terrible, but now a strong dollar is also bad. That’s what happens when you view the world through a dark prism.)
A strong dollar is good for inflation (since it keeps prices down), good for buyers of imports, good for Americans who travel abroad, and good for the country generally.
Speaking of inflation, it remained at a paltry 1.7% for the 12 months through November. Higher prices are the great scourge of business owners, consumers and investors. So a low number here - still below the Fed’s target of 2% - is a positive for financial markets.
The earnings recession is officially over. After three consecutive quarters of negative corporate profit growth, after-tax earnings at U.S. corporations rose 5.2% in the third quarter. That was the strongest year-over-year growth since the fourth quarter of 2012.
The Federal Reserve officials unanimously approved a second rate hike last month. Why is that good news? Because investors should welcome a return to normal monetary policy.
The ultra-low rates of the last few years have been a powerful but artificial stimulus. But a strengthening labor market, rising commodity prices and an uptick in manufacturing have convinced the Fed that the patient - the U.S. economy - is out of the ICU and ambulatory again.
And let’s not forget the market itself. After stumbling out of the gate in January, the Dow picked itself up in the spring and then sprinted after the surprise outcome of the November election. It ended the year up 18%.
Much of this rally is due to investors’ expectation that President Trump will sign into law new policies that will reduce the world’s highest corporate tax rate, simplify the tax code, reduce burdensome regulations on business, and repair and upgrade the country’s crumbling infrastructure.
In short, equity investors have a lot to look forward to in 2017. The trend is most certainly your friend.
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