Stocks continued to move up last week as all major U.S. indices hit new highs. Investor optimism rose as expectations for deregulation, possible tax cuts and fiscal stimulus under the new administration accelerated. These same factors put upward pressure on bond yields and the U.S. dollar. A strong Dollar has historically been good for the stock market. The reasoning is simple. If you are a European or Japanese, would you leave your money in a bank which takes a piece of your money given negative interest rate policies; or would you rather send your money to the US where we have positive interest rates and a rising stock market?
Here are some visible economic trends:
- Consumer confidence is growing. The University of Michigan Consumer Sentiment Index jumped from 87.2 in October to 93.8 this month.
- Monetary policy has remained accommodative but improving economic data should lead the Federal Reserve to raise interest rates next month. At this point, we would be surprised if the Fed did not raise rates in December and we expect central bankers to hint at a few more increases in 2017. Rising interest rates will attract more foreign money to the US.
- Inflation expectations are increasing. We think oil and copper prices are rising as we expect higher levels of federal spending next year. The coming fiscal stance is projected to become more expansionary as public spending and capital investment rise while taxes are cut. This will provide a stimulus to the economy.