I am extremely fortunate to have chosen my profession. There are very few boring days when it comes to watching the markets react to economic & political events, and the fourth quarter of 2016 was no exception.
The biggest political news came on November 8th, but the result was not a surprise if you had believed the S&P 500 election predictor. There were many prognosticators that correctly predicted the stock market would collapse if Trump won the election. The problem is that the S&P Futures only collapsed momentarily. By the time the market opened on November 9th, the S&P 500 was almost positive, and it never looked back for the rest of the quarter.
Sir Isaac Newton, who lost a fortune in the South Sea Bubble once said “I can calculate the motion of heavenly bodies but not the madness of people”. That quote describes perfectly how I feel about the US Stock market: Valuations appear expensive based on many indicators, but that doesn’t mean stocks can’t continue to go up. If the ‘madness of people’ can drive valuations higher, it is likely that one day again they will do the opposite, and drive stock valuations lower.
Likely encouraged by a rising stock market, the Federal Reserve raised the federal funds rate at their December 14th 2016 meeting. Longer term interest rates, which are not directly controlled by the Federal Reserve (if you ignore their $4 Trillion balance sheet) rocketed higher starting November 9th.
For almost 8 years now investors have believed that low interest rates are good for asset prices and the economy. I agree that low interest rates are good for asset prices, but it is debatable that low interest rates are good for the economy. Speaking of the madness of people: Now that interest rates are moving up, investors seem to have forgotten that higher interest rates are not normally positive for asset prices.