S&P 500 Stock Prices
March 15, 2017
The S&P is at record high level. of 2383. Since the election the stock market has gotten excited about possible policy changes supported by President Trump. In the upcoming months we should see both corporate and individual income tax cues, corporations being allowed to repatriate overseas earnings to the U.S. at a 10% tax rate, a significant reduction in the regulatory burden, revamping of the dysfunctional Obamacare system, and in the years ahead some shrinkage in the budget deficit.
The cut in the corporate tax rate and repatriation of overseas earnings should give rise to a tidal wave of investment spending which should, in turn, boost growth in productivity. If productivity growth accelerates than the economic speed limit should climb from 1.8% or so currently to 2.8% within a couple of years. Those gains in productivity will help to keep inflation in check. Specifically, we look for the core inflation rate to increase from 2.2% in 2016 to 2.5% in 2017. And if all of that transpires the Fed will continue on its very gradual pace of rate hikes. By the end of 2017 the funds rate is expected to be about 1.25%. More rapid GDP growth, low inflation, and low interest rates should be a dynamite combination for the stock market.
As we see it the stock market and the economy will continue to climb at a moderate pace in 2017.