Annual Quarter Cast

Review

One year ago, when we provided our annual forecast, we estimated that the S&P 500 would get up to 2284 in 2016. The high for the year was 2278, which was hit on Tuesday of last week.

A year ago we predicted that the 10 year yield would get up to 2.6% by the end of 2016. When rates drifted lower we changed our forecast to 2.4% in June, and then lowered it again to 2.2% in August. On December 16 the 10 year treasury yield hit it’s high for the year at 2.6%. We should have stuck with our original prediction.

Lastly, we forecast that GNP growth would come in at 2.7% for 2016. While we haven’t seen the final numbers for the year, it looks like the US economy will grow by around 2.1% in 2016.

So much for forecasts. Most importantly we thought that stocks would have a decent year in 2016 and bonds would not. That has been the case. Optimism is strong in the equity markets right now and grimness reigns in the fixed income world.

Forecast

The consensus forecast for GNP growth in 2017 is 2.0%. Our experience tells us that the one growth rate that will not occur for 2017 is 2.0%. It is extremely rare for the economy to click along at the same rate of growth for two years in a row.

There is a majority view that interest rates will rise further in 2017 and will put a lid on growth. We agree with the rising rates, but we think that the reason rates will increase is because of stronger economic growth. We are looking for economic growth of 2.5% next year.

We expect the Federal Reserve to raise rates once and possibly twice next year. Our forecast is for the rate on the 10 year treasury note to hit 3.0% over the next twelve months. We wouldn’t be surprised if the pattern of 2015, when the low in rates came in the first part of the year, was repeated in 2017.

We still like stocks. We believe that the multi-quarter shrinking of corporate profits ended in 2016 and that the next twelve months will see an increase in business earnings on the order of 12%. That would put annual earnings of the S&P 500 companies at $132.67. That gives us a target for the S&P 500 of 2388 in 2017. We wouldn’t be surprised if we saw that objective hit in the first half of the year.

We don’t expect volatility to go away in financial markets. China, European debt, and energy markets are worrisome. Major unpredictables are associated with a new administration intent on changing the tax code. Politicians worldwide are bent of earning their nationalistic credentials. But through it all, we see the upward pull of a strong economy moving equities higher.

As the New Year starts we wish you the best. It is our privilege to be trusted by you. May all your good anticipations be realized, whether by serendipity or sagaciousness!