December 2016 Market Insight

January 3, 2017

With winter now here and the holidays in the rear-view mirror, the markets also shared in the holiday cheer with a positive (but uneventful) December. The S&P 500 and Russell 2000 Indexes, which measure domestic stocks, were up 2.47% and 3.08% respectively. International stocks, per the MSCI World Ex US Index, were up 2.39%. US core bonds, funds that act as a centerpiece of bond fund investments, declined 0.30%, per the Barclays Aggregate Bond Index.

One key event that occurred during December was the decision by the Federal Reserve to increase interest rates by 0.25%. At this point, we do not know how many times the Federal Reserve will raise rates in 2017, but the expectation going into the new year is that it could be 2-3 times. Keep in mind that just because the Federal Reserve raised interest rates does not necessarily mean that checking, savings, and CD rates at your local bank will increase as well. We have been in an extremely low interest rate environment for several years now, so you may find that banks’ lending rates will increase while their deposit rates will remain stagnant or come with very little change in the near future.

One important factor to watch in 2017 is whether rising interest rates will have any effect on inflation. If inflation does start to rise, it will be important to see if the growth of the economy follows. Will inflation and growth keep pace with each other (called “reflation”)? If we see a reflationary environment, along with potential new governmental regulations and policies, you may see sectors like financials, industrials, and consumer discretionary holding a larger position in portfolios. If growth lags behind a rising inflationary period (called “stagflation”), we may see consumer staples and other defensive sectors hold more weight.

Feel free to contact us for help with your investment strategies. We would be glad to provide a complimentary second opinion on your current plan. 

Keywords: stock market, stocks
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