Macro Overview / Year In Review

A year-end equity rally induced by a Trump victory lost momentum towards the end of December as doubts surfaced regarding Trump’s success in garnering support for his proposals from both Republicans and Democrats in the House and Senate.

Two thousand sixteen was laden with uncertainty surrounding rates, growth, oil, th
e election, and Brexit. The S&P 500’s 15% drop in February proved to be temporary, as did the 10-Year Treasury Bond yield drop to 1.36% in July following Britain’s vote to leave the EU. As many times before, the market’s resilience carried it out of negative territory and onward to positive gains.

Oil also made a powerful comeback in 2016, rising from $26 a barrel in February to $53 a barrel at year-end. The rise in oil prices was a result of OPEC production cuts and an abundance of production coming from U.S. producers, helping lead the U.S. towards energy independence.

Equity markets pulled back at year-end as a gradual shift from equities to bonds took place, encouraged by the recent increase in bond yields, making fixed income attractive relative to a couple of months ago. A traditional rebalancing occurs at the end of each year, either shifting assets away from stocks to bonds or from bonds to stocks. This occurs as multi-billion dollar pension funds reallocate asset classes as expectations adjust.

A number of banking and financial industry regulations are in question as Trump is expected to repeal various rules and provisions that many believe have hindered lending and consumer credit expansion. Trump will have the ability to repeal numerous rules and regulations almost immediately under the Congressional Review Act (CRA). The possibility of political hurdles and non-approvals for some of Trump’s appointments may cause uncertainty leading to volatility in the markets.

Two well regarded barometers of consumer confidence rose in December to higher levels. The University of Michigan’s preliminary consumer confidence index rose to 98 and the Conference Board’s Consumer Confidence Index rose to 113.7. Sentiment among U.S. consumers is critical to the health of economic growth as greater spending evolves from growing confidence.

Sources: Univ. of Michigan, Conference Board, Bloomberg, Reuters, SMacro Overview – February 2017

A change in sentiment was prevalent throughout the markets as new rules and regulatory reversals began to take effect. Volatility rose as markets tried to discern President Trump’s policies.

Equity markets propelled to new highs in January as optimism fueled U.S. equities, sending the Dow Jones Industrial Average to a new milestone level of 20,000. The S&P 500 Index and the Nasdaq Composite Index also reached new highs during the month.

Executive orders undertaken by the President were able to derail several rules signed into law by the Obama administration, yet fiscal policy initiatives proposed by President Trump such as tax cuts and tax reform need Congressional approval. The Congressional Review Act (CRA) will allow the Republican led Congress to reverse a number of regulations enacted by the prior adminustration.

Among President Trump’s first actions as president was to withdraw the U.S. from the Trans-Pacific Partnership, strengthen border parameters with Mexico and temporarily disallow certain immigrants from entering the U.S. Two highly contested oil pipeline projects were granted the ability to advance, the Keystone Pipeline and the Dakota Access pipeline.