The period following the November presidential election was, by many measures, extraordinary. Equities soared, bonds and interest rate sensitive stocks declined, while Dow leader Goldman Sachs saw its share price climb by 30% in just six weeks. By now, we're all familiar with the thesis: less regulation, lower taxes, greater fiscal spending on infrastructure, higher inflation and more rapid growth will all contribute to earnings growth in 2017. The ability of the new Trump administration to rapidly advance each of these themes, however, is at best uncertain. Nonetheless, each issue has likely contributed to the equity rally and bond market decline.
Of these factors, the most likely new policy of the administration out of the box is widely believed to be some sort of a tax cut. And therein lies the rub, as we turn to 2017. In post-election 2016, higher stock prices were driven by greatly expanding p/e multiples. Whether new policies, if enacted, may contribute to earnings growth and thus, lower multiples over time, we can only guess.
But one thing appears all but certain. The market is convinced that lower tax rates will prevail in 2017. In fact, this one single factor may have contributed the most to the post-election rally, and may now pose the greatest risk to 2017: a lack of selling in November-December if capital gains were deferred to 2017. With the New Year just days away, we'll soon find out whether this is in fact what has happened. That being said, it might be well worth putting stops in place, just in case.
The New Year will also see the ability of scheduled OPEC cuts to restore balance to the oil markets. The first quarter is typically a period of scaled-back production for Saudi Arabia and many other OPEC producers. It will be critical for oil markets to see some cuts in production over and above the normal seasonality to instill the confidence necessary to support prices. OPEC member production will also be monitored closely for cheating, as has been the case with prior OPEC agreements. To this, we add scaled up production by US shale producers and potential demand saturation in China as inventories, ramped by lower prices, are expected to fill. If the market loses confidence in the ability of OPEC to manage the oil glut, prices could fall swiftly and dramatically.
With the December Fed meeting now behind us, it's unlikely the Fed will do much for the next several months, as they await new information. Thus, bond markets will be driven by hard economic data, in short supply over the past several weeks. The strong dollar has already negatively impacted exports, raising the trade deficit, and thus weakening projected GDP. If fourth quarter consumer spending data is weak, bond yields will accelerate their descent of the past few sessions. In this environment, interest rate sensitive stocks will gradually rise, as we're now beginning to see in telcos, utilities and select REITs.
The first quarter of 2016, following the Fed's December 2015 rate hike saw bank stocks decline, utility stocks rally, bond yields fall and gold rise. That was against the backdrop of a sharp selloff in stocks early in Q1. Nonetheless, gold, bonds, utilities are now all higher following the Fed's December 2016 rate hike. Financials are lower. Caution is advised.