It is lazy to assume that trading continues in a straight line through a calendar. As 2016 ends it will just carry on with a trajectory into 2017.
Instead, as the year ends, US stocks may be in for a rude awakening in 2017.
While the FTSE 100 index in London ended at a record high – and intraday high - on Friday of 7,142.83, the almost-ceremonial pre-new year’s rally often leads to a crash in the first days of the next year.
May that serve as a lesson to Wall Street too. Only in the case of US shares that message might already be getting through as the market has begun to stall.
But first the good news
Looking back, it’s been a stellar year of gains for US stocks. Despite the risks of the UK’s Brexit vote, brinkmanship over Canada’s trade deal with the European Union, geopolitical risks across Europe posed by terror attacks from Paris, to Nice, to Berlin, to Ankara, and the surprise election of a US President who was supposed to be less the favourite of Wall Street than Hillary Clinton, US stocks have posted record highs after record highs.
Even a deal by OPEC to cull a huge supply glut finally delivered in November and oil prices scooped themselves off the painful floor. Yes it all happened in 2016.
Having started the year at 17,600, the Dow Jones Industrial Average had to endure a scary drop – along with other tickers like the bellwether S&P 500 – because of concerns about China's economic slowdown and plunging world oil prices. The 6% selloff was the Dow's worst five-day start to a year on record. By mid-February when oil prices were on their knees, the Dow fell as far south as 15,660, before brushing off a year of risks and daring several times in December to challenge the record 20,000 mark. All the way up the hill since mid-year it passed by record after record. So did all the other main tickers, including the mid-cap S&P 400 and small-cap S&P 600 and Russell 2000.
Much of the gains came despite world shocks and perhaps because of – not despite - the biggest surprise of them all – that a Republican outsider not gifted in politics or Washington links had won a decisive election victory.
Dow futures plunged more than 900 points on election night as it became clear Clinton had lost unexpectedly. Theory would say that a market rout was supposed to follow.
Instead, pro-business Donald Trump first won over the American rustbelt voter and then went on to win over Wall Street bankers and even the technology boffins from Silicon Valley with whom he had waged war during the long-drawn out campaign for the White House.
Not inaugurated until January 20 next year and having so far dodged a press conference of his own, Trump has already presided over a huge equities rally since the Nov. 8 poll as he promised to slash taxes, roll back financial regulation and unleash infrastructure spending which has carried the Dow nearly 1,500 points higher since the election.
In fact, the bourse endured just a five-hour sell-off followed by a six-week rally since Nov. 8.
Even though the Dow won’t crown its year with 20,000, it came to within 13 points of it last week and its gains from its lowest point of the year will be in the realms of 26%.
The S&P 500 staged a similarly dramatic move, ending an incredible 25% above its low from February, when the price of oil crashed to $26 a barrel. The Nasdaq, home to winning tech stocks like Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX), is closing the year 30% above its bottom.
That’s all very impressive.
But now the reality of 2017
The honeymoon for Trump may last two years or if the stock market stalls early in 2017, about three months.
A number of major hurdles await and many unanswered questions. Although appointments from Trump’s transition team have been flying out of the door there are concerns about how much experience they have and how long they will survive before technocrats are installed to replace them.
Trump has promised to create jobs and reflate the economy. Hard cash will be required and that means borrowing if he has vowed to cut taxes. Yet the Fed, apparently in tandem with his own demands, is now in the process of killing off easy money and hiking interest rates.
The Fed may not be able to hike as much and as often in 2017 as it has signaled in mid-December, but there’s no pretending that the cost of credit is rising and with it the US government’s ability to pay for credit.
To deliver the kind of spend Trump has in mind will cost billions of dollars and it may bring him into conflict with his own Republican-dominated Congress. Looking at popular British premier of the 1980s Margaret Thatcher – when she expanded her lawmaker absolute majority in Westminster in the 1983 General Election to 100 seats she quickly discovered that her biggest opposition was not other political parties in parliament but her own backbench MPs.
Trump may soon find himself at odds with the most libertarian wing of Republicans who are suspicious of any attempt by the Federal government to interfere in the economy and who loathe any increase in public spending.
But perhaps relying on their support over reflationary economics isn’t the only hurdle. Trump may find that his biggest problems will be related to foreign policy and that these issues may occupy so much legislative time that pledges to expand the economy don’t get a look-in during his first two years in office.
On that basis, it might not be until late 2018 that Trump starts to make good on promises to voters – by which time they might desert him and deny him a second term.
Trump has so far managed to also surprise investors in many ways. Firstly, he has upset the pharmaceuticals sector by replicating a pledge made by rival Clinton in the race for the White House. He has said he will not allow drug companies to raise prices and may act to bring them down. Investors hadn’t seen that coming and pharma stocks have had a restrained end to 2016.
Meanwhile, Trump has tried to appease the tech sector, inviting them this month to a tete-a-tete in New York where he praised the boffins. Tech stocks from Facebook to Google (NASDAQ:GOOGL) to Tesla Motors (NASDAQ:TSLA) saw their stock prices benefit.
With political dynamics like that at play, it is anyone’s guess how the next year will be for US stocks.
But if the last week of 2016 is any guide, expect a rocky ride.
The bull market in US stocks is on track to turn eight years old in March. The S&P 500 has more than trebled since President Barack Obama's 2009 inauguration because of the economic recovery from the Great Recession and extremely low interest rates from the Federal Reserve.
Will we celebrate a bull run come March?
Some experts reckon the euphoria over Trump is overdone. And that includes his adviser and activist investor Carl Icahn. They see the rally as out of control and in need of calm. Managing expectations has helped many politicians stay in power.
After all, Trump hasn't even taken office yet and there's no guarantee his stimulus proposals will be enacted or be effective.
Others fear Trump's anti-trade campaign rhetoric will turn into protectionist policies and trigger a destabilising trade war. Already he’s upset the second-largest economy China by courting renegade state Taiwan.
So what’s the verdict?
Moderation doesn’t mean losses. If returns this year were 10% expect in the order of 5% in 2017, experts say.
Many investors are looking closely at what sectors and individual stocks to buy as they worry the overall bull market is getting weary.
Below are a few stocks to consider buying in 2017.
Analysts are calling out stocks in some of the most-hit sectors, either during the election campaign or since the election.
So a tech stock like Broadcom Limited (NASDAQ:AVGO) is likely to fare well because a key player in wireless technology it will continue to beat expectations and trim costs.
In healthcare, Envision Healthcare Corp (NYSE:EVHC) will have a good year because the company is coming off a merger with AmSurg in a very strong position to be a dominant player in hospital care, especially services that don't require an overnight stay.
Financials? You can take your pick of any number of banks who will relish any prospect of restricting regulations, such as a watering down or even abolition of Dodd-Frank legislation brought in under President Obama.
But one name likely to get into the groove is State Street Corp. (NYSE:STT) because the company continues to quietly but surely trim costs and win more customer assets, which translates directly into more fees.
The much-maligned Delta Airlines (NYSE:DAL) could be another winner because both leisure and business travel continues to pick up, especially as post-election optimism has soared. Of course, Delta isn’t likely to be the only beneficiary.
Dycom Industries (NYSE:DY) was another likely winner because the company which supplies many of the workers who build telecom services, will be able to build on 2016 gains. The stock had a wobble in February but has fought back and the share price gained.
Bank State Street might be a winner in 2017, but it is interesting and perhaps worrying that the rally has begun quite so fast and gone so far. Among banks to see a surge in their share price was – ironically - an establishment name that Trump had threatened to disrupt if he won.
Goldman Sachs (NYSE:GS) stock is up a stunning 32% since Trump's victory as investors bet the bank will capitalise on higher interest rates, less regulation and more M&A.
The post-election surge has allowed Goldman's stock to finally fully recover from the 2008 financial meltdown.
What is more, the Goldman rise represents 24% of the gains of the Dow since November 8. That’s largely because GS is the most expensive stock component in the Dow. And unlike the more modern-day S&P 500, the 120-year-old Dow is a price-weighted average, meaning expensive stocks have more influence on the index than lower-cost ones.
Trump has built a bridge to Wall Street, and perhaps wisely, to Goldman Sachs veterans, a number of whom he has hired for his first team. They should help to get the financial regulations shake-up to look and feel “right”.
But should anything go wrong to Goldman’s share price, expect the Dow to take a bath.
Lest we feed on helium, let’s just remind ourselves of some of the stocks which didn’t enjoy 2016: Wells Fargo (NYSE:WFC), Yahoo (NASDAQ:YHOO), Twitter (NYSE:TWTR), and Mylan (NASDAQ:MYL), to name but a few.
Sobering stuff, and precisely why the rally should not be relied upon. Caution as ever.