Looking ahead to 2017
Investors have been very enthusiastic following the election. The major indexes have set new record high levels and the Dow Jones Industrial Average is within striking distance of the 20,000 mark.
Valuations for the market are also higher than average which means that the expectations for next year are very optimistic.
The current forward PE or price to earnings ratio for the S&P 500 is 17.1. The PE is calculated by dividing the price of the index by the aggregate earnings of the companies which make up the index. The five-year average PE has been 15.0, and the ten-year average is 14.4, so the current valuations are fairly high by historical standards.
Earnings for the S&P 500 are forecast to grow next year. The current forecast for the fourth quarter of this year, 2016 is for an earnings growth rate of 3.0%.
Many forecasters are predicting a rise in inflation and interest rates next year. Market driven interest rates have risen sharply since the election. The yield on the benchmark ten year US Treasury bond has risen from about 1.8% to about 2.4%. The FOMC, Federal Reserve Open Market Committee, will meet today and they are expected to increase the Fed funds rate at today’s meeting.
There are several areas of the market where legislative changes could have an impact on stocks.
We are likely to see some changes in tax law that will allow companies to repatriate assets denominated in foreign currencies without paying as much in taxes as would be required under current law. Look for changes that will take away the incentive for companies to do corporate inversions and move business overseas.
Changes in health care law and also anticipated. The Affordable Care Act will be under review and any changes there could definitely have an effect on companies in the Healthcare sector.
There has been quite a bit of talk about increased infrastructure spending and hopefully we will see some bills to improve highways, bridges and other forms of our infrastructure.
One thing to remember here is that infrastructure projects are long term and can take quite a while to get started. President Obama had a great quote on infrastructure spending when he said, “Shovel-ready was not as shovel-ready as we expected.” It can take a long time to get projects funded and approved.
We should certainly expect some changes next year and will have to monitor them as the go through the legislative process.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.