We have written about the stock market response to a Trump presidency. Mr. Trump may be able to push through tax cuts, stimulus spending in infrastructure improvements and make a deal to bring home massive amount of capital currently sequestered offshore. Many believe this will stimulate the economy, bring on inflation and cause the Fed to raise interest rates, which in turn would drive the dollar higher. But will this help the stock market or will the 2017 stock market be a huge disappointment? Fortune weighs in on the side of a lackluster market in 2017 and says that Trump will be terrible for stocks in 2017.
Even while some Wall Streeters are saying Donald Trump’s presidency could result in stronger domestic growth and a boost to the stock market, a team of Goldman Sachs GS 0.03% analysts led by top strategist Charles Himmelberg are saying, “Not going to happen.”
Stocks already look expensive from a historical perspective, the team says. And Donald Trump is not going to help the matter. As a result, the Goldman analysts are expecting the S&P 500 Index to close at 2200 in 2017-just 18 points, or higher than where it is now. Goldman also expects the price of the U.S. 10-year Treasury bond to drop 0.50% in 2017. The yield, which moves in the opposite direction of price, will end the year up at 2.75%.
The argument behind this opinion is that there are structural factors that are not addressed by Mr. Trump’s plans. There are not enough workers to fill all of the jobs that Trump envisions. Thus the result of more jobs will not be more productivity, profits and higher stock prices but rather increased competition for skilled workers and wage inflation. If Mr. Trump follows through with deporting more willing workers from the USA that will further reduce the pool of available workers.
“We are skeptical,” the team wrote. “Until more clear evidence accumulates showing that the outlook for productivity and trend growth has improved, the opportunity set for investors is likely to remain low.”
All the hyperbolic rhetoric in the world will not keep the already overpriced market from being a huge disappointment in 2017.
Is There Any Hope for Stock Gains in 2017?
The Goldman Sachs analysis has to do with the market in general and certainly applies if you are going to put your money in an index fund that tracks the S&P 500. But are there sub segments of the market that will do better? The Wall Street Journal says that small beats large when looking at the next few months in the market.
Small companies have been among the biggest winners since Election Day.
Investors betting that Donald Trump will roll back regulations and taxes while pumping money into infrastructure projects have driven the Russell 2000 index of small-capitalization stocks to 11 straight sessions of gains Friday, its longest winning streak since June 2003. The index has risen 10% since Election Day, outpacing the S&P 500’s 2% climb.
Hopes for a pro-business combination of a Trump presidency and Republican Congress have lifted stocks broadly. But some analysts think smaller companies could benefit even more, because they are less exposed if Mr. Trump takes a more protectionist approach to trade and if the dollar continues to rise. Either development, along with the growing backlash against globalization as seen in the Trump and Brexit votes, could hurt multinationals and leave smaller, domestic companies relatively better off.
Smaller and domestic stocks may well be better choices if the overall 2017 stock market turns out to be a huge disappointment.