The contentious presidential election finished November 8 with Donald Trump elected the 45th President of the United States. The Nelson Roberts Investment Advisors fourth-quarter presentation titled “Election Apprehension Obscures Economic Strength” hypothesized that the capital markets were suppressed by uncertainty surrounding the presidential election. That proved prescient as the stock market rallied post-election pushing the Dow Industrial Average near 20,000. Despite the noise and hand-wringing that accompanied the election, when the dust settled, it was the economy that took center stage and proved to be a catalyst for stock market growth.

The economic expansion that began eight years ago has been frustratingly slow, but very persistent. Now entering its 91st month, the current expansion is the fourth-longest in the last 120 years. Despite its impressive duration, the 2.1% average growth rate ranks this expansion among the slowest in history. We anticipate that this slow-growing economy will finally accelerate with the election overhang behind us. Employment numbers continue to impress: the unemployment rate has dropped to 4.60% and wages are growing. Consumer confidence soared to 113.7 at the most recent measurement after lagging for most of 2016. Housing metrics suggest a sustained recovery.

President-elect Trump will inherit an economy in great shape and a corporate earnings environment poised for growth. He will benefit from a Republican-led Congress that is likely to be receptive to traditionally Republican policy proposals. We anticipate an immediate effort to lower tax burdens for individuals and corporations alike. Lower corporate tax rates could provide a significant boost to the U.S. economy, especially if corporations repatriate earnings. Estimates suggest that there is as much as $2.5 trillion dollars overseas. For example, Microsoft and G.E. reportedly each hold over $100 billion offshore. Corporate leaders have been loath to pay the 35% U.S. corporate tax rate to repatriate those dollars.

A Trump administration’s shift to fiscal stimulus will increase inflationary pressures. In the near term, these forces will be offset by a sluggish global marketplace, particularly in China, which is struggling to generate growth. The Fed, after intimating all year that an interest rate rise was forthcoming, acted at the December meeting. It finally moved the Fed Funds rate a quarter of one percent higher to a 0.50% – 0.75% target. The Fed is facing a conundrum: increasing rates to moderate inflation will cause the U.S. dollar to rise even more. Higher rates here have attracted more capital to the U.S., which has caused the dollar to rise by 5.5% relative to the euro over the last twelve months.

High on our list of concerns is building nationalism worldwide and the negative impact it may have on global trade. The use of tariffs to protect products or industries would put pressure on U.S. prices as competition abates.

The stock market’s strong finish to the year contributed to solid full-year returns. The domestic markets were particularly strong, with the S&P 500 finishing up 11.95% and the Russell 2000 index posting an impressive 21.28% return. Foreign markets were not quite as robust, but they did break a two-year losing streak with a calendar year return of 1.59%. The U.S. dollar continued to appreciate relative to most foreign currencies. Emerging markets provided a boost of 11.27%, benefiting from the stabilization of commodity prices, particularly oil.

Considering all of these factors, we enter 2017 optimistic that the stock market rally will continue. The corporate earnings recovery has begun and we believe it will accelerate well into the new year. Both consumer and corporate sectors will contribute to economic growth above the current 2.1% average for the recovery. It is impossible to predict what the incoming administration and Congress will do. Therefore, we cannot anticipate which of the economic sectors will benefit most, so we maintain S&P 500 index-like weightings across economic sectors as we enter 2017.

There is risk of inflationary pressure, but in the short term that pressure will be offset by a global economy that struggles to grow. We believe that anemic growth will keep rates from spiraling out of control, which will keep borrowing costs low, and further boost the economy. Building inflationary pressures will keep bonds relatively unattractive.

The Trump agenda will be long on rhetoric (or at least 140 characters long) but short on substantive change. The most impactful change could be a simplification of the tax code, which has become a labyrinth of confusion since President Reagan’s last major reform thirty years ago.

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