Equity investors toast the New Year in.

A solid start to the year for equity markets culminated in the FTSE 100 making a series of new highs. US markets likewise trade at record highs; however, the Dow Jones index has so far failed to break the 20,000 mark, despite getting within a whisper. The contrast for how investors are approaching 2017, with the start of 2016, when sentiment was decidedly bearish, is very noticeable. This week’s rise seems to have added to the optimism for equity markets for the year ahead. A week of stronger than expected economic data from all regions also helped underpin equity markets. In contrast to the end of 2016, the” Trump bump”, as the market rally is now being affectionately known as, has not continued to be reflected in bond prices, so far.

Towards the end of 2016 equities rallied and US treasury prices fell as investors sold bonds to buy equities, the “reflation trade”. Equities may have reacted to better economic data at the start of the year, however bond yield prices have not. In fact, for choice the US yield curve has flattened slightly from the start of the year. Likewise, the US dollar, which had also been strong into the new year on expectations that “Trumponomics” will lead to a more aggressive policy from the Federal Reserve, gave up ground over the past five days.

The first big test for equity investors may come this week as the fourth quarter and year-end earnings announcements start later Monday, with Alcoa as always starting the ball rolling. As regular readers are aware Alcoa is a leader in aluminium products. Aluminium is used in a variety of consumer goods from cars, to planes to household goods. As such the company’s earnings are viewed as a window on the strength of the broader US economy.

Alcoa’s earnings are closely followed by the US banks, whose shares have put in the best quarters performance for almost 25 years. The analyst community is forecasting year on year growth of 3% for the S&P 500 companies for this quarter. What will be of interest to the investment community is how the strong dollar will have impacted earnings. At the start of most every year equity analyst predicts 10% corporate earnings growth for the year ahead, this year is no exception. They are usually forced to lower these expectations as the year progresses.

The other event that could impact investor sentiment this week are speeches from several leading members of the Federal Open Market Committee. These include Janet Yellen, the chair, Boston Fed president Eric Rosengren and St Louis Fed president James Bullard. James Bullard was considered one of the Fed’s hawks, however last year he has become more dovish.   

As the UK economy continues to defy those who became extremely “Brexit bearish”, Wednesday sees the release of Novembers Industrial and Manufacturing data. After Octobers dip, forecasts are for a rebound. 

Posted on January 8, 2017 .