The only thing as surprising as Trump’s victory is the stock market rally that has followed. Most predicted a plunge in the stock indices if he were to win, but instead we are witnessing all time highs being chalked up in the market almost every day. While much of the recent runup in the stock market has been attributed to Trump’s comments that favor growth in certain sectors such as Infrastructure, Financials, Pharmaceuticals among others, one could argue that recent economic data, suggesting that economic fundamentals are improving making a case for overall growth in the US to be strong in 2017, is equally responsible for the stock market rally. As much as the coincidental timing of Trump’s victory and improvement in economic conditions was propitious, the question is will the recent stock market rally continue into 2017 or stall as Trump assumes the Presidency in January?
Looking at the economic data that came out this week, we can glean some encouraging signs from a few bullish indicators.
- Strong consumer spending took US GDP growth to 3.2% in the third quarter, exceeding previous estimate of 2.9%. This prompted the Atlanta Fed to forecast GDP to rise at a 3.6 percent rate in the fourth quarter, supporting market expectations that the Federal Reserve will raise interest rates next month. Growth above 3% in second half of 2016 compares to just 1% growth in the first half of 2016.
- After a year of leaving interest rates alone, it is almost a certainty that Fed will increase the rates by 25 basis points in their meeting on Dec 13-14. More important will be the commentary from Janet Yellen about the prospect of further increases in 2017. Bullish comments could be interpreted as a prediction of further economic growth next year.
- Unemployment rate fell to 4.6 percent.Tight labor market was reflected in an increase in consumer confidence which has climbed back to levels seen before the 2008 recession. This positive sentiment could reflect in heavy consumer spending over the holidays.
- Corporate profits rebounded in the third quarter with earnings representing 9.2% of GDP, up from 7.8% in late 2015. Exports also grew in third quarter contributing almost a full percentage point to the GDP growth numbers pointing to robustness in international trade.
- On Wednesday, OPEC agreed to its first oil output cuts since 2008. This should alleviate the global oil glut and prop oil prices while stimulating economic growth in several sectors that have suffered from years of low oil prices.
Future Wealth’s View
The above economic data suggests to us that we may be witnessing robust economic growth next year that could bode well for continued rally in the stock market. Economic growth could also be supported next year if Trump succeeds in pushing through Congress a fiscal stimulus plan that includes massive infrastructure spending and tax cuts. On the other hand, risks of global weakness, especially in Europe and China, and dramatic reversal of campaign promises by Trump could put the rally off track. Now, here is something that will not be a surprise to anyone – Do not expect a dull moment in the next Presidency.