Will Slowdown in Economic Activity See Market Correction in 2017?



US market performance

After the November 2016 US elections, the markets surged with high hopes of reforms and increased economic activity. In the last quarter of 2016, we saw an improvement in various macroeconomic indicators and continued recovery in emerging markets. Let’s look now at market performance over the last year, as shown in the graph below.

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Markets see rally post US elections

Major US indexes (SPY) (VOO) have rallied since the US elections in November 2016. The S&P 500 Index (SPX-INDEX) and the Dow Jones Industrial Average (DJIA-INDEX) rose about 10.0% and 11.0%, respectively, in 2016. The rise was mainly driven by the expectation of tax cuts, regulation reforms, and increased infrastructure spending by the Trump administration.

Market slowdown in 2Q17

According to BlackRock chair and chief executive officer Larry Fink, high expectations for the Trump administration are driving the markets (SPY) (QQQ). Investors who were on the sidelines started investing to take advantage of the rally that began in the last quarter of 2016. But returns have been lower since the beginning of the second quarter of 2017.

Most of the economic fundamentals look strong with solid earnings by corporations. But uncertainty about the implementation of reforms by the Trump administration seems to have overshadowed the markets.

The S&P 500 Index (SPX-INDEX) and the Dow Jones Industrial Average (DJIA-INDEX) have risen about 1.0% and 2.0%, respectively, in the second quarter of 2017 as of April 25, 2017. Economic indicators that signal the slowdown include the following:

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  • The consumer price index in March 2017 showed a fall in prices for the first time since February 2016.
  • Retail (XRT) sales fell 0.20% in March, the second consecutive fall in 2017.
  • The manufacturing PMI fell to 52.8 in April 2017 from 53.3 in March, well below market expectations of 53.5.
  • The number of jobless claims rose in mid-April 2017 compared to the previous week.

These data points highlight the US economy’s (SPY) (QQQ) choppy performance in 1Q17. The markets will also closely watch the Fed’s tightening monetary policy in 2017 after its three rate hikes since December 2015.

Corporate sentiment

According to Fink, capital investments by corporations will be on the sidelines until they get clarity on the implementation of reforms by the Trump administration. Manufacturing activity is expected to slow down. We can already see that the PMIs as of March 2017 have fallen. The markets can expect some correction in the second quarter of 2017 until something tangible comes out of policy implementation.

Let’s look next at the importance of the proposed reforms by the Trump administration.


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