The Dow Jones Industrial Average (DJIA) got within 13 points of 20,000 last Tuesday. It finished the week about 90 points below the vaunted milestone. “The Dow has gained nearly 10 percent since the end of October, more than double its 4.1 percent rise during the first nine months of the year, spurred in part by Donald J. Trump’s victory in the 2016 U.S. presidential election,” Barron’s reported.
The major U.S. indices have been strong performers since early November. Many people are wondering whether they will continue to do well in 2017. The Economist suggested 2017 could hold a surprise that will negatively affect investors’ expectations:
“By definition, a surprise is something the consensus does not expect…investors are expecting above-trend economic growth, higher inflation, and stronger profits…So it is not too difficult to see how the first surprise might play out. Expectations for the effectiveness of Mr. Trump’s fiscal policies are extraordinarily high. But it takes time for such policies to be implemented, and they may be diluted by Congress along the way (especially on public spending). Indeed, it may well be that demography and sluggish productivity make it very hard to push economic growth up to the 3-4 percent hoped for by the new administration.”
On the other hand, profitability has improved. American companies have seen earnings rebound, and many companies are positioned to benefit from the corporate tax cuts promised by the new administration. However, this good news may already be reflected in current share prices. Robert Shiller’s cyclically adjusted price-earnings (CAPE) ratio, a measure of valuation based on average inflation-adjusted earnings of companies in the Standard & Poor’s 500 index from the previous 10 years, was at 27.99 on December 23. That’s almost 70 percent above its long-term average of 16.05 and indicates markets may be overvalued.
Regardless of potential negative surprises and current market valuation, many analysts expect a positive performance from U.S. stock markets next year. MarketWatch reported, “Most house projections from the big investment banks and brokers converge around the S&P closing the year at 2350 – a scant 5 percent above current levels. Only one strategist…dares to suggest that 2017's gains could be as much as 20 percent.”
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SOURCES:
http://www.barrons.com/articles/dow-gains-for-seventh-week-but-misses-20-000-1482555878?mod=BOL_hp_we_columns (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/12-27-16_Barrons-Dow_Gains_for_Seventh_Week_but_Misses_20000-Footnote_1.pdf)
http://www.economist.com/news/finance-and-economics/21712144-how-markets-may-take-investors-surprise-what-not-expect-2017(or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/12-27-16_TheEconomist-What_Not_to_Expect_in_2017-Footnote_2.pdf)
http://www.multpl.com/shiller-pe/ (or go tohttps://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/12-27-16_Multpl-Shiller_PE_Ratio-Dow_to_Drop_80_Percent_in_2016-Footnote_3.pdf)
http://www.marketwatch.com/story/will-us-stock-markets-soar-20-in-2017-2016-12-23