The start of 2017 will be interesting as investors adjust to new policies and decisions from President-elect Donald Trump and anticipate the Federal Reserve's next move on interest rates.
"In aggregate, our base case is for equities to grind higher in 2017, anchored by our expectations that corporate earnings will increase, the pace of inflation and wages gains will be moderate, and future Fed rate hikes will be measured and deliberate," Terry Sandven, chief equity strategist at U.S. Bank Wealth Management, wrote in an email. "Providing the basis for our outlook of higher earnings and stock prices are the changing political and investment landscapes. Sentiment has clearly improved with stocks advancing in anticipation of President-elect Trump's pro-growth agenda."
One key indicator for the health of the U.S. economy is the jobs report. On Friday, Jan. 6, the markets will receive the December jobs report for 2016. In November, the unemployment rate was 4.6%, dropping from 4.9% in the prior month, while adding 178,000 jobs, according to the U.S. Bureau of Labor Statistics. Wages increased by 2.5% in November.
The Federal Reserve will release minutes from its December meeting in which it upped interest rates for only the second time in roughly a decade. At that meeting, the central bank opted to hike interest rates by 25 basis points, putting the fed funds rate at 0.5% to 0.75%. The decision was unanimous. The Fed said the near-term risks to its economic outlook appear "roughly balanced."
The Fed also raised its forecasts to show three likely rate hikes in 2017, up from two previously predicted. The Fed kept its forecast for three hikes in both 2018 and 2019.
"Earnings versus Fed-driven liquidity and multiple expansion is likely to be the primary driver of equity prices in 2017," Sandven added.
On the economic calendar in the coming week: the PMI Manufacturing Index for December, ISM Manufacturing Index for December and construction spending for November will be out on Tuesday; motor vehicle sales for December and the ADP Employment Report for December on Wednesday; the ISM Non-Manufacturing Index for December on Thursday; and international trade for November and factory orders for November on Friday.
Equity and bond markets will be closed on Monday in observance of the New Year's holiday. Trading will resume as normal on Tuesday.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.