WEEK AHEAD
NEW YORK: After a late-year rally fuelled by the US election pushed stocks to surprising new peaks, investors are wary that the market could be primed for a spill to start 2017.
The benchmark S&P 500 is set to post a roughly 10 per cent price gain for 2016 and around 12 per cent on a total return basis, including reinvested dividends.
That tops the single-digit increase expected by market participants polled a year ago, with more than half of the advance coming after Donald Trump’s November 8 presidential victory.
The Dow Jones Industrial Average was on pace to rise more than 13 per cent for 2016, with a total return above 16 per cent.
From here, though, investors expect the S&P 500 to rise by mid-single-digits in 2017, according to a Reuters poll earlier this month.
Reflecting the renewed bullishness for equities, US-based stock funds pulled in $11.8 billion in the week ended December 28, data from Lipper showed on Thursday, marking a sharp reversal from most of the year.
But investors see several warning signs for 2017, including stocks at traditionally expensive valuations; investors registering particularly bullish sentiment; and the Federal Reserve primed to raise interest rates several times this year.
Meanwhile, a market lifted in part by hopes for Trump’s policy agenda could be deflated should any of those hopes be dented once he begins in office.
The S&P has rallied by more than 5 per cent since Election Day, while the Dow has climbed by more than 8 per cent.
“If anything, we head into the new year with the likelihood we will probably see some near-term weakness in equities primarily because of the move we’ve seen higher,” said Peter Kenny, Senior Market Strategist at Global Markets Advisory Group in New York. ‘‘You will see some winning trades being taken off the table and, in general, a reset.”
January has proven to be a difficult month for equities in recent years, with the S&P 500 falling at least 3 per cent in each January of 2014, 2015 and 2016.
The beginning of 2016 was marked by the worst 10-day start ever for the S&P, plagued by worries about a rout in commodities, a China slowdown and a potentially over-aggressive Fed after it hiked interest rates for the first time since 2008.
A year later, a test for the market could come as soon as next week.
Investors may have been holding off on selling their winners until 2017 with hopes that any profits will be taxed at a lower rate under a Trump administration.
“A lot of people have postponed selling gains this year, expecting that they are going to have lower tax brackets next year,” said Paul Nolte, Portfolio Manager at Kingsview Asset Management in