Key Points:
- Economic outlook becoming more positive for the US in 2017.
- Rate hikes likely to moderate a bullish US equities market.
- US stocks likely to benefit from article 50 triggering.
After what has been a rather remarkable year in more ways than one, the outlook for 2017 is looking marginally more sedate but also somewhat more positive. Specifically, the recent Federal Funds Rate decision has revealed a number of important issues to keep in mind for equities the coming year.
First and foremost, one can’t ignore the statements accompanying the announcement of the 25bps rate hike. Decidedly more hawkish in tone and implying an accelerating schedule of rate changes, the Fed’s stated intent to pull the US out of a lower interest rate environment is being met with some mixed sentiment. On the one hand, higher rates should play their usual role in depressing US stocks. However, implicit in the Fed’s decision to begin normalising higher interest rates is a stronger economic outlook and improving employment statistics.
As a result, many are expecting to see inflationary pressures rise and the US economy begin to move out of its protracted slump. Moreover, much of the market is also greeting “Trumponomics” with open arms and pricing in the incoming president’s policy as being bullish for US equities. Specifically, reduced corporate taxes, incentives to re-shore overseas cash, and vital boosts to infrastructure spending are all expected to provide an economic stimulus to the US now that monetary policy’s simulative effect seems to be waning.
Of the countervailing forces, the bullish influence of Trump’s fiscal policy and the implied improving economic climate from the Fed’s hawkish pivot seems to be outweighing the depressionary effects of future rate hikes. Additionally, the effect of the Fed’s announced intentions to raise US rates is being somewhat muted by their general reluctance to deliver on this year’s promised rate hikes. What’s more, the FOMC has proven itself to be highly data driven in its decisions on rates as of late which is causing much of the market to doubt whether or not the central bank can really make such promises this far in advance.
Overall, this should lead to 2017 being a year of modest growth for US stocks as the recent surge in sentiment will have to moderate. As mentioned, this is largely due to a bit of jawboning by the Fed but it will also likely take a while for some of the initial cloud of uncertainty surrounding a Trump presidency to disperse. However, US stocks could also benefit from another major political upset seen this year, the effects of which will be surely felt in 2017.
Namely, Brexit is far from done impacting the markets as the planned triggering of Article 50 in March could result in a fresh wave of capital fleeing both the UK and the EU. Even in the event of a “soft Brexit,” London is expected to take a significant hit to its financial industry. The main recipient of this swing away from London is widely believed to be New York which could add further fuel to the ongoing US equities rally. Largely, this would be due to the surplus UK and EU capital, alongside the re-shored US Capital following Trump’s new policy, finding a new home in the US markets.
Ultimately, it seems as though we may have finally reached a point of inflection for the US equities market. However, the mixture of forces coming down the line in 2017 by no stretch of the imagination ensures a continuation of the rallies seen in the immediate wake of the US election. On the contrary, there is likely to be some substantial moderation as things begin to calm down which may seem almost comical, given the nature of the man now poised to oversee the world’s largest economy.