Q4 Market & Economic Update: A Solid Year for Growth

by Jeffrey Kravetz January 1, 2017

Growth in Arizona slid in the second half of 2016, and is expected to remain at a somewhat slower pace into early 2017. Despite that, the past year has shown a solid expansion in population, jobs, and income, which is expected to continue through 2017. Phoenix was the fastest growing region in the state; through the third quarter of 2016, Phoenix ranked 2nd nationally for financial sector job growth, and 3rd in information and technology. Headwinds for 2017 include the post-election strength of the dollar vis-a-vis the Mexican peso, which is expected to hit exports, as well as travel and tourism to the state.

Economic Trends

Global economic data continues to march to a positive drum beat. Inflation trends, survey data and central bank sentiment are all generally favorable. We expect global economic growth to finish 2016 on a positive tone, but there is little evidence that 2017 will be a year of acceleration. Instead, our view is for a continuation of slow, but positive growth, anchored by continuing policy support.

  • S. survey data was encouraging along with inflation trends. The National Federation of Independent Business (NFIB) Index of Small Business Optimism has rebounded post-election to the highest levels in two years and component survey trends point to further improvements in 2017. The National Association of Home Builders (NAHB) Housing Market Index, an index of home builder sentiment, rose to its highest post-financial crisis levels, indicating further home building growth is likely. Lastly, inflation data continues to trend modestly higher, consistent with an improving economy.
  • Year-over-year consumer prices have risen 1.7 percent through November (2.1 percent excluding food and energy), while producer prices have risen 1.3 percent over the same timeframe.
  • Flash Purchasing Managers Index (PMI) data for Europe and Japan point to a strengthening in growth trends to finish out 2016. Inflation measures also ticked higher – which we interpret as a positive for growth trends – after working through deflationary pressures.

Equity Markets

In the final weeks of 2016, U.S. equities outpaced international, small caps outperformed large companies and, on balance, growth/cyclical sectors outperformed defensives on the heels of ramping expectations for President-elect Trump’s pro-growth agenda. Our base case is for U.S. equities to grind higher in 2017, anchored by our expectations that corporate earnings will increase, the pace of inflation and wage gains will be moderate and future Federal Reserve (Fed) rate hikes will be measured and deliberate.

  • Our 2017 S&P 500 price target is 2,400, based on a multiple of 19 times our below-consensus 2017 earnings estimate of $127. As of last Friday’s close of 2,258.07, the popular index is roughly 1.5 percent above our 2016 price target of 2,225.
  • In aggregate, improving sentiment and associated increased spending implies economic growth, earnings acceleration and (presumably) higher stock prices, albeit contingent on the magnitude and timing of legislative action on policy items, such as corporate tax reform, infrastructure spending, the Affordable Care Act and Dodd-Frank. While the U.S. economy appears to be in a Goldilocks zone, bolstered by Trump’s pro-growth agenda, risks remain.
  • Among global headwinds likely to weigh on stock prices in 2017 are dollar strength weighing on U.S. corporate profits, vulnerability in emerging markets from higher inflation and falling business confidence, rising tensions between an incoming Trump administration and China, rising bond yields, and Fed tightening. We favor growth-oriented sectors, such as technology, healthcare and consumer discretionary, in anticipation of accelerating earnings growth, modestly higher U.S. inflation, less regulatory scrutiny and lower taxes.

Commodities Markets

The Fed was the key driver for the commodity complex in December. The “hawkish” tone led to U.S. dollar strength and generally pressured the complex, especially gold, which touched its lowest price since February. With the Fed raising rates, other major global central banks, including Europe, Japan and England, are maintaining easier monetary policies, which implies the dollar is likely to strengthen and create a headwind for commodity prices. Gold, in particular, is likely to remain under some pressure, with prices poised to test post-financial crisis lows in 2017. In the near term, prices are likely to moderate due to light holiday trade and an “oversold” technical condition. Commodity markets are expected to remain fundamentally well supplied, which may limit gains.

Jeffrey Kravetz is Regional Investment Director for The Private Client Reserve of U.S. Bank in Phoenix.

Investment products and services are:

Not a Deposit Not FDIC Insured Not Guaranteed by the Bank
May Lose Value Not Insured by Any Federal Government Agency

This information represents the opinion of U.S. Bank. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Investors should consult with their investment professional for advice concerning their particular situation.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general, and is not available for direct investment.


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