Renewed optimism for faster growth in 2017 has been driven by expectations for increased government spending, decreased regulation, and greater fiscal stimulus. In addition, positive inflation trends and a stable labor market support the case for additional Fed rate hikes next year, which could add momentum to the recent rotation out of global bonds and into stocks.
A non-linear trajectory to record highs
U.S. stocks could reach new highs in 2017 amid expectations that Trump’s platform will make additional tax reductions and increased corporate spending possible, potentially leading to stronger corporate earnings growth. This combination may outweigh concerns about political uncertainty and Trump’s protectionist stance. Should global bond yields continue to rise, the rotation from select Utilities and Consumer Staples stocks with overinflated valuations—and from high-dividend-paying stocks in general—into cyclical sectors could continue. Small-cap U.S. stocks, Financials, and Industrials, could benefit the most.
Overseas: Developed markets may outperform
Increased currency volatility seems likely next year, driven by rising inflation expectations, political uncertainty, and divergent central bank policies. Developed markets could outperform emerging markets if Europe and Japan continue to recover, while volatility among emerging markets seems likely to continue.
The SPDR S&P 500 ETF Trust (NYSE:SPY) was trading at $226.60 per share on Tuesday morning, up $0.89 (+0.39%). Year-to-date, SPY has gained 12.30%.
This article is brought to you courtesy of Charles Schwab Investment Management.