Saturday, January 7, 2017

MAD Economic Review 1/7/17

It's a new year and time for a new you. If you haven't followed the traditional path of making a resolution for the new year, by all means you're not too late.  Most people focus on doing things like losing 10lbs, or spending more time volunteering. All are worthy goals, but most people never say "This year I vow to get my investments in line", or "I'm going to work on paying off my debt".  Those are seldom heard unfortunately.  If you haven't made a resolution you're in luck as I'll be posting an article next week with great financial resolution ideas for 2017. It might be a tad late, but there's plenty of time still to declare our resolutions for the year.

 Of course a new year also means plenty of people clamoring to tell you what to invest in, and where things are going this year.  By all means I have expectations too.  I am well aware though that those expectations can be wrong, and one must position themselves appropriately to mitigate risk while sticking to a rock solid financial strategy that can weather any storm. But that's how the market works. It's the collective expectations of everyone across the globe voting their opinion(expectations) with their hard earned money.


Determine your goals, develop a diversified approach, and sticking to the plan are the basic tenets of winning the investment game.

So let this year be the year of you.  And also a year that is so far getting off to a much better start than 2016. Although last years rocky start was a great buying opportunity for keen investors(including here).  Let's get to it.

Economic News

The Federal Reserve released their minutes from the December meeting, which was the one they raised interest rates. The Fed let everyone know they planned on raising rates 3 times in 2017, and 3 times in the year after that, and the year after that for a total of 9 planned rate hikes in 3 years.  After a decade of zero rate hikes this is an aggressive prediction from the Fed.  Remember when the they first raised rates they thought there would be 3-4 hikes in the following 12 months. That turned out to be false as it took the entire year for them to raise again.

Now I know there are some really smart people working for the Federal Reserve and I respect the organization greatly. Yet I sometimes wonder where they get their predictions from. Of course if they prove to be correct then great. It means they've correctly identified the trend and we should all be grateful for that.

No matter what happens the USA appears on a path to higher interest rates which will only fuel a stronger dollar.  Reason being is much of the rest of the world is still trying to find ways to lower interest rates, or keep them in negative territory!  Investors across the globe will find themselves drawn to a stronger US currency, and yield.  That's one of the few trends I can see being most reliable this year. I don't think the line is going to be straight up, but the trend should remain intact.

The US Dollar looks like is comfortably sitting above the 100 level.  While it may dip back down into the 90's a time or two, I think we can expect it to spend more of this year above 100 than below it.


 There were some other economic releases this week including ISM Index, NFP, and AHE as most notable.  The ISM Index came in with a strong reading of 54.7, up from the prior 53.2. Non-Farm Payrolls came in a bit soft with 156k new jobs, but the market seemed to shrug this lower number off. The trend is still intact for job growth, albeit soft growth.  More importantly Average Hourly Earnings came in with a 0.4% increase raising the average wage to $26/hr.

Frankly we need higher wages mostly overall as it will allow people to buy more of the goods and services they want and desire. That in turn will help push up company sales and profits.  These two don't operate in a vacuum.  It's not as if wages live in one world and company health in another.  They are connected, and we need a strong stable business environment to help them both succeed.

Equity Markets

By now you've probably heard the Dow Jones ended the year up 15%, The S&P up 9%, Nasdaq up 7%, and the Russell 2000 ended up 19%.  The performance disparity is quite large in my opinion overall. You'd think that with all 3 indexes being up it's a good thing.  Usually their performance is pretty close for the year with just a few points difference. This year we saw some large gaps. The market is always telling us something with the way it performs.  Clearly mega large cap multi-nationals, and domestic companies were the best performers this year.  The reasons why will probably fool most people.



Earnings for the S&P 500 are expected to come in at $108/share for 2016, and $130/share for 2017. That means the index is currently trading at a P/E of 17 for this year.  That's not exactly bubble territory based on this one metric.

2016 Q4 earnings are going to start rolling in quickly after next week.  I think a lot of the gains are already priced in after the huge rally to end the year.  So if your company reports a winner and the stock pulls back don't be alarmed. That's normal behavior.  Instead look at the guidance your company is giving. That will let give you better insight as to how the company will perform this year.

So far the S&P is already up 1.7%, the Dow 1.0%, the Nasdaq 2.6%, and the Russell is up 0.7%.  It will be interesting to see how this year pans out. Always is.

Here's to a great weekend, and fun start to 2017!

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