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Subject:  Just A Thought  

Date:  Jan 28, 2017
 

Friends,

 Happy New Year!  I don’t need to tell you that 2016 was quite the year.  A political campaign kept us all in an uproar most of the year.  The economy made improvements in jobs, earnings, housing and most areas, but it did so at a very slow rate.  The stock market was surprisingly dull for most of the year, then surprisingly vigorous in the fourth quarter.  When the year was over, the market had moved up, and it had made gains pretty much in line with our predictions.

  Looking ahead, things appear less clear than they have in many years.  I think we can be reasonably confident that the Republican led government will be looking hard at lowering corporate taxes and also lowering/simplifying personal taxes.  Lowering corporate taxes can be very stimulative for the economy as a whole.  Currently the tax rate for US corporations is 35%.  For every 1% drop in the corporate tax rate, S & P 500 earnings are expected to go up 1.3%.  The news is reporting that the new administration is calling for corporate tax rates in the 15 -20% range.  A cut anywhere close to that could potentially lead to higher stock market prices as the profitability of the underlying companies rises.  I look forward to the discussion on the subject.

 There is every reason to believe that the gradual increase in employment we have been seeing for years will at least continue at its current pace.  Scrappage of old homes, the creation of new households, and the movement of the population to new areas continues to drive a need for 1.5 million new homes a year.  New home building is much less than that despite record low home mortgage rates.  With a gradually improving economy, we expect to see gradually rising interest rates.  That will raise mortgage rates, but hopefully not enough to hurt home sales.  Today mortgage rates are in the low 4% range for good credit buyers, I doubt they will hit 5% this year.  I can’t believe that any mortgage rate below 5% will scare off buyers.  Rising interest rates do not hurt an economy, high interest rates going higher will hurt an economy.  We are nowhere near that.

 Trade policies will get lots of attention and there will be lots of talk on all sides of the issue.  Change in trade policies always happens with changes in party in power.  Most of the things we import are discretionary purchases, and would be reduced by tariffs and higher prices.  Most of what we export are more necessary than discretionary, i.e. oil, food, timber, etc.  Seems hard to believe that trade battles would reduce those sales by a lot.  We will be watching this subject closely.

 I think that lower corporate tax rates will happen, increasing stock prices.  I think that interest rates will increase by ½% across the economy.  I think that political turmoil will dominate the news, but economic growth will dominate the markets, and I think those markets will increase about 10% in 2017 and that we will profit well over the year.  To quote Leonard Nimoy, Live Long and Prosper!  Stand By.   

 
Richard T. Holden, CFP®

 Financial Advisor

 Raymond James Financial Services

 
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