Stocks are at, or near, depending on the day, all-time highs. Call it the Trump effect or optimism about the U.S. economy.
In the latter case, there was optimism enough for the Federal Reserve to have raised rates in mid-December.
But a few broader trends lie in wait and are likely to make stocks a bit turbulent in 2017.
Inflation is on the rise. See, again, the decision by the Fed to boost rates. With unemployment at 4.6 percent, wages slowly climbing and inflation generally gaining, along with the dollar, one wonders what might happen when the Trump stimulus plan comes along. Tax cuts and deficit spending might goose inflation again, which would push rates higher via the Fed (not one, not two, but three rate hikes may be in the offing over the near term). At that point, there is a delicate dance between promoting growth and truncating it.
The Trump administration seems to be hanging on to a stated growth rate for the U.S. economy of as much as 4 percent, annually, which is a nice goal. But the question is, how do we get there, even with stimulus spending? If the impression is that the economy cannot grow much beyond the 2 or 3 percent level (roughly, a global yardstick), could it be that stocks are pricing a lot in, with the post-election rally? A stronger dollar may not auger well for international firms, where, of course, sales and profits also come from overseas. And there’s another wrinkle in the form of trade wars that may or may not erupt between the U.S. and other nations, which also would hurt multinational firms.
All of this — and with stocks baking in multiples of 25 trailing 12 months of earnings — may hint at some volatility moving forward.