December 2016 Monthly Outlook
The second estimate of Q3 GDP came in at 3.2%, stronger than the initial estimate of 2.9%, and the strongest quarterly economic growth rate in the last 2 years. Employment continued to expand in October with the unemployment rate dropping to 4.9%. The continued employment growth and stronger economic growth caused long term interest rates to jump sharply in November as the 10 year government yield increased 54 basis points to 2.37% at month end.
The Conference Board Leading Economic Index® (LEI) for the US increased 0.1% in October to 124.5. “The U.S. LEI increased in October for a second consecutive month. Although its six-month growth rate has moderated, the index still suggests that the economy will continue expanding into early 2017,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The interest rate spread and average weekly hours were the main drivers of October’s improvement, helping to offset some of the weaknesses in claims for unemployment insurance and new orders.”
Indicators point to the US economy growing slowly (~2% annually) and being in the late stages of a long business up-cycle without major excesses that brought down some prior economic upturns.
Stock and Bond Market Commentary:
Before the US elections on November 8th, the markets were on edge and dropping slightly every day in the three weeks before the election. Around 9PM on Election Day when the market realized Donald Trump would likely win, Dow stock market futures dropped nearly 700 points, but by the time the market opened up the next morning it was flat and went up consistently the remainder of the month. Since the election everyone has been speculating on what a Trump administration means for the economy and stocks. The initial reaction of the markets has been to sell the safest asset classes and buy the riskiest assets classes and sectors on the hope Trump administration policies will create higher inflation. Thus far, the markets seem to think the new administration will reduce regulations on the banking industry, which caused the financial sector to increase a whopping 14% in November. Further the markets are speculating on increased infrastructure spending, which drove the industrials and materials sectors to increase 9% and 7% respectively.
The bond markets did not respond as favorably post-election with interest rates increasing 54 basis points in November, sending the bond markets down 2.57% and the Real Estate sector down 2.34%. In line with the theme of selling safer assets and sectors, the consumer staples sector tumbled 4% and the utilities sector dropped 5%. While its seems everyone is trying to position their portfolios to best take advantage of a Trump administration, it is important to remember that anything the new administration proposes will take several months, if not years, to implement. And further, it will take several years to determine the effects of these policies on the markets.