Equity Markets – Global Stock Market Overview

Despite starting 2016 off to a rough start, equity markets propelled towards the end of the year. The Dow Jones Industrial Average was up 13.42%, the S&P 500 Index increased 9.54%, and the technology heavy Nasdaq Index gained 7.5% for the year.

Because fiscal and regulatory changes expect to engulf the markets in 2017, the environment has evolved into a stock pickers market. The search for specific companies in specific sectors that may benefit from fiscal and regulatory changes is considered superior to just buying a passive index of broad stocks.

The potential for economic growth due to a combination of personal and corporate tax cuts, government spending, and less regulation could eventually boost earnings for stocks.

With U.S. companies having reduced expenses and minimized debt exposure over the past few years, any increase in profitability margins have become difficult. This is why revenue growth will be essential for many U.S. companies in 2017 while contemplating a higher dollar, lower tax rates, and fewer regulations.

A validation that we are heading into a stock pickers market is the decrease in correlation that has occurred among stocks. When stocks are highly correlated, it’s a sign that investors are all buying or selling the markets; but when correlation is low, it’s a sign that investors are buying or selling specific stocks for specific reasons. Recent dynamics such as a higher dollar, rising rates, and possible import tariffs have created obstacles for certain companies. Deregulation, lower corporate tax rates, and infrastructure spending have created new opportunities for a host of other companies. (Sources: S&P, Bloomberg, Reuters, Dow Jones)

Mortgage Rates Starting To Rise – Fixed Income Markets

The Fed raised short-term rates in December as expected by a quarter point to between 0.5% and 0.75%, the first increase since December 2015. The Fed also announced that it expects to raise rates three times in 2017 contingent on economic growth and inflationary pressures.

Optimism about economic growth has led to higher inflationary expectations, which eventually translates into higher interest rates. Over the past two months, the yield on the 10-year U.S. Treasury has increased from a historical low of 1.35% to 2.45% at the end of December. As a gauge for mortgage rates nationally, the increase in the 10-year Treasury has also led to an overall increase in mortgage rates. According to data made available by Freddie Mac, the average rate on a 30-year fixed mortgage loan increased from 3.44% in August to 4.32% at December’s end. The concern economists have is that as mortgage rates continue to increase, home sales and affordability may begin to be hindered. (Source: Bloomberg, U.S. Treasury)

Home Price Growth Rate Double Of Wage Growth Rate – Demographics

The onslaught of continued low interest rates has fueled the housing market to higher levels. In addition, a recent shortage of skilled housing workers has added to the industry’s stress as fewer homes have been built while lessening the supply of homes available for sale. Consequently, a growing demand for homes nationwide has propelled the growth rate in housing prices above the growth rate for wages. The concern is that home prices have been rising faster than wages, thus decreasing affordability for families across the country.

Should wages begin to grow at a faster rate than home prices, homes will become more affordable for buyers. Since the beginning of 2012, the House Price Index tracked by Freddie Mac, rose over 24% as of the third quarter of 2016. For the same period, the Wage Growth Index, compiled by the Bureau of Labor Statistics, grew just over 11%. (Sources: Freddie Mac, BLS)

Dollar Nears Parity With Euro – Euro Update

Continued weakness with the euro has become a focal point with currency markets as the central bank of Europe continued with its stimulus efforts by keeping key rates at historical lows in Europe. The combination of Brexit and ECB stimulus efforts have gradually been adding downward pressure on the euro throughout the year. The ECB commitment to buy government and corporate bonds in Europe has greatly influenced the ultra low rate environment.

A weak euro may bring about inflationary pressures in those countries that rely on imports, while countries relying on exports, such as Germany, could benefit with a weak euro allowing for greater exports and economic activity.  (Sources: ECB, Eurostat, Bloomberg)

U.S. Dollar Finishes Higher For 2016 – Currency Market Review

The U.S. dollar had strong gains against various major currencies in 2016. Clarity surrounding the Fed’s decision to start raising rates along with anticipated growth expectations from Trump’s policies have catapulted the dollar. Both the anticipation of higher rates and a growing economy can help send currencies higher. The dollar is up over 20% versus the Mexican peso, 4.5% versus the euro, 20% versus the British pound, and up 7.25% versus the Chinese yuan. (Source: Bloomberg, Federal Reserve)

What’s Different In 2017 For Taxes – Tax Planning

For 2017, the IRS is revising more than 50 tax provisions for both individuals and business taxpayers. Any changes or modifications made by the new administration may or may not be applicable to 2017 taxes. So for the time being, the following IRS revisions are effective for the 2017 tax year.

Standard Deduction – will increase from $12,600 to $12,700 for married couples & from $6,300 to $6,350 for single filers.

Alternative Minimum Tax (AMT) – the exemption amount will increase from $53,900 to $54,300 for individuals and increase from $83,800 to $84,500 for married couples.

Senior (65+) Medical Expense Deduction – ability to deduct medical expenses rise to 10% of AGI up from 7.5% of AGI.

Mileage Expense – is falling to 53.5 cents per mile from 54 cents per mile for business miles & 17 cents per mile down from 19 cents per mile for medical & moving purposes

No Health Coverage Penalty – increases to $695 per adult, or 2.5% of income up to a family maximum of $2,085

Estate Tax Exemption – will increase by $40,000 up to $5.49 million

(Source: IRS.gov, Tax Foundation)

As Trade Confrontation Looms With China….Japan Passes China As Largest Owner Of U.S. Treasuries – International Trade

U.S. Treasury Department data released in December revealed that Japan has surpassed China as the largest foreign holder of U.S. Treasuries. For years, China has held more U.S. Treasury debt than any other country, making it the single largest foreign creditor. As pressure has mounted for China to allow its currency to float freely, it has gradually been selling Treasuries in order to raise liquidity and help elevate its currency.

China has been careful not to create any perceived issues with its currency since the yuan became part of the International Monetary Fund’s (IMF) special drawing rights in October 2016. This will allow the yuan to become a legitimate reserve currency along with the euro, pound, and dollar. China’s position in U.S. debt is at its lowest levels since 2010.

(Sources: U.S. Treasury, IMF, Bloomberg)