Can the aging bull market survive through 2017, and possibly beyond, in the face of dramatic shifts in economic policy under the Trump administration? Yes, says renowned economist and Bottom Line Personal regular contributor Allen ­Sinai, PhD. It even will likely become the longest bull market in history, stretching to 10 years in 2019, Sinai predicts. But that will depend on whether President-elect Donald Trump’s ambitious economic stimulus plans are not undercut by what could be a new era of rising inflation and interest rates, trade wars and mounting federal budget deficits. As for 2017, Sinai expects a 7% gain for the Dow Jones Industrial Average and stronger economic growth than in the past several years.


Here’s what he sees ahead…

Revved-Up Economic Growth

Since March 2009, the Standard & Poor’s 500 stock index has more than tripled even though the economy has grown only moderately. But until now, it did not feel as though we could match the mighty economic expansion and nine-and-a-half-year bull market of the 1990s. The economy has grown just enough for corporate earnings to rise without igniting serious inflation or triggering higher interest rates, which are two main reasons bull markets end. And much of the fuel for that growth has come from Federal Reserve actions, including near-zero interest rates.

The Trump administration will usher in a starkly different economic environment by attempting to accelerate growth through massive fiscal stimulus measures. Trump’s plans include…

Stepped-up infrastructure spending. Overall government spending has been flat to negative for the past seven years, partly because of resistance from Republicans to greater spending. Trump’s plans include a proposal to boost spending on roads, bridges, airports and other infrastructure by up to $1 trillion over 10 years, spurred by tax breaks for private investment in such projects.

The biggest federal tax cuts since President Ronald Reagan’s 1981 cuts. Trump would reduce the number of income tax brackets from seven to three…sharply reduce the corporate tax rate…and reduce personal income tax rates, among other steps. Critics say that these cuts are skewed toward the wealthiest taxpayers, which would limit the positive effects. But I believe the tax cuts for the middle class would be enough to spur increased consumer spending…promote economic growth…and propel the stock market to repeated new highs.

The cuts also would lead to higher inflation because increased demand will allow businesses to raise prices. To combat inflation, I expect the Federal Reserve to increase its pace of short-term interest rate increases. That won’t hurt stocks right away, but it already is having a profound impact on bonds, raising yields and pushing down bond prices.

Foreign Trade Dangers

My greatest concern is the uncertainty caused by Trump’s protectionist and isolationist rhetoric. Restricting free trade through measures such as placing heavy tariffs on imports could elicit retaliatory measures and spiral into trade wars, creating higher prices for US consumers and hurting US exporters, especially technology companies. That could undermine growth in the US and many other nations, including China, Mexico and Canada, and pare back stock gains.

If Trump can moderate his trade policies and avoid major international economic and political clashes, however, I think the global economy could greatly improve in the coming year.

My international forecast: Global gross domestic product (GDP), a key measure of economic output, is likely to grow by 2.9% in 2017, up from about 2.5% in 2016. That improvement will reflect gains in the US, Asia and emerging markets, where growth in 2017 will be helped by higher commodity prices as well as the end of deep recessions in Brazil and Russia. Moreover, China, whose growth has been shrinking in recent years, will finally stabilize, thanks to government stimulus measures. Its 2017 growth should tick upward slightly to 6.8% from 6.7% in 2016.

Key US Economic Measures

Here’s what I expect for the US…

GDP will likely gain 2.7% in 2017 and more than 3% in 2018. While this is far below the average growth rate of 3.9% in economic expansions over the past 50 years, it’s a vast improvement from the 2.1% average since 2009. The chances of a recession—defined as two consecutive quarters of negative growth in GDP—are remote.

Inflation: As measured by the Consumer Price Index (CPI), the inflation rate will likely hit 2.3% in 2017, compared with 1.6% over the past year through October 2016. I predict oil will reach $60 per barrel in 2017 as global demand strengthens, compared with less than $50 in November 2016.

Unemployment. I expect the US to end 2017 with an unemployment rate of 4.3%, compared with 4.9% in October 2016. The steady drop in unemployment already has been forcing businesses to compete for new hires. And that is finally translating into healthier pay raises. Average hourly earnings for private-sector work are likely to jump by more than 3% in 2017 after averaging gains of less than 2% in each of the past five years.

Outlook for Stocks

Including dividends, I expect the Dow to return 7% in 2017 and the S&P 500 to return 8%. Stocks are at the high end of “fair value” from a historical perspective. However, they can avoid becoming overpriced if the economy grows at a stepped-up pace. For 2017, I expect earnings of S&P 500 companies to rise by a strong 7% to 9%, on average, helped by greater sales volumes and rising prices. At the same time, higher interest rates will make it more expensive for companies to borrow money for expansion, but that will be outweighed by the earnings growth.

Best areas of the market for 2017…

Infrastructure stocks. Stocks of construction and engineering firms should benefit from increased federal spending.

Financial stocks. Banks are likely to be big beneficiaries of higher interest rates, which help improve profit margins on mortgages and other types of loans. Banks also will face a less punitive regulatory environment because the Dodd-Frank Act, the post-­financial ­crisis legislation that has subjected banks to more stringent rules and higher capital requirements to protect against losses, will likely be repealed or weakened by Trump and the ­Republican-controlled Congress.

Consumer discretionary stocks. Consumers will have more disposable income as wages rise and taxes are cut. Service- and family-oriented businesses, such as those in the travel and leisure sector, are especially attractive.

Areas of the market to avoid…

Utilities and real estate investment trusts (REITs), which often are viewed by investors as bond substitutes, will be hurt because their dividends will look less attractive as interest rates rise.

The Bear Market for Bonds Is Finally Here

I expect the Federal Reserve’s benchmark short-term interest rate to reach around 1⅜% by the end of 2017, compared with 0.25% to 0.5% in November 2016.

That means a somewhat tougher environment for borrowers. Savers will get some relief, but banks will not increase the interest rates they pay on money-market funds and certificates of deposit (CDs) as quickly as they raise the interest rates they charge on loans.

It looks exceptionally unattractive to hold most US bonds compared with stocks in the coming year. Reason: Bond yields will rise and bond prices will fall as massive government spending and tax cuts swell federal deficits, leading to an increase in the issuance of government bonds to pay government bills. The yield on 10-year Treasuries, which was 2.37% as of November 30, is likely to reach near 3% by the end of 2017.

The broad US bond market should experience losses for 2017. Stay away from US bonds with maturities of 10 years or more, but do consider buying Treasury Inflation-Protected Securities (TIPS), which were undervalued as of November. They provide investors with returns that will keep pace with future rates of inflation.

Related Articles