What Will Markets Look Like in 2017?

December 28, 2016

After November’s US presidential election, many analysts forecast doom and gloom for the US economy. Several predicted that the dollar would collapse and equities would remain under pressure as businesses entered a panic. Almost two months since the election, most of those fears have proven to be unfounded as new landscape takes form. As President-elect Donald Trump’s cabinet takes shape, and his policies are fleshed out more for the public, analysts are now predicting the possibility of a strong economic outlook for the new administration.

2017 finance

However, while the signs point toward optimistic outcomes, there are some major hurdles looming for Trump’s young presidency. Many of his proposed plans have rankled feathers on both sides of the political divide, and some of his planned policies have even struck a negative chord within his own Republican Party. If Trump becomes bogged down by politicians on each side of the aisle, many of the gains forecast in the short-to-medium term could be indefinitely delayed, or at worst, completely erased.

A Brighter Future Ahead?

Despite the severe warnings from experts and pundits regarding the economic impact of a Donald Trump electoral victory, markets have been busy signaling quite the opposite. In the short time since the election, all three major equities indices—the Dow Jones, Nasdaq, and S&P 500—have risen to record heights, while the US dollar has been on a tear against a basket of major currencies.

Thanks to the recent decision by the US Federal Reserve to raise its benchmark interest rate, along with is hawkish forecast of three hikes in 2017, the dollar has been picking up momentum as the US economy’s fundamental outlook improves. Trump’s victory has provided a significant boost as analysts begin to parse his proposals and analyze his cabinet nominations.

While there are many who disagree with his political proposals, few have argued against Trump’s economic policies, which include some common-sense plans alongside other more ambitious ones. One of the major platforms of Trump’s campaign, and of his transition, has been a drastic expansion of infrastructure spending. While it might seem to clash with Trump’s stated goal of reining in the Federal budget, fiscal spending has the potential to turn a US deficit into a strong surplus over the medium-term.

Another Trump proposal that could play a major role in injecting cash into the US economy while creating a friendlier environment for business investment is his plan to reshape the country’s tax system. Following his platform of encouraging businesses to return jobs to the US, Trump has proposed a higher tax on US imports, while offering generous tax cuts to those companies that produce and export from the US. This could lead to significant cash inflows, especially as many US-based multinationals would seek to repatriate much of their offshore cash flow in an effort to avoid costly taxes.

Hurdles Remain

While these proposals have the potential to boost markets and the US dollar, hurdles remain from the political side. Trump’s ambitious infrastructure investment plans fly in the face of Republican philosophy of fiscal responsibility and budget reduction. Additionally, many have argued that the repatriation of jobs is difficult, and could face opposition from members of Congress as well as powerful lobbies.

However, with a Republican-controlled Congress and strong tailwinds already pushing the economy forward, Trump’s presidency is well positioned to expand on recent gains. If his cabinet, which has been lauded by some for its combined business acumen, can succeed in implementing some or all of Trump’s proposed policies, US equities and even the dollar could aligned for an excellent run in 2017.