Rotarians heard James Ragan, the director of individual investor group research at D.A. Davidson, share economic outlook for the new year.
Ragan addressed the impact of Donald J. Trump on the economy the day before President Trump’s inauguration.
“I’m here today to talk to you about Animal Spirits,” he said, providing Rotarians with some context before diving into his analysis.
“It basically encompasses the human emotion, which leads to increased confidence. So that could be consumer confidence. That could be business coordination. It could be corporate confidence,” he explained.
“So we’ve certainly seen a big market rally since the election in early November. And what we’ve seen really is strong confidence numbers both form consumers and businesses,” Ragan observed.
He described the seven-week period that followed Election Day a “pretty furious rally.
“Most investment professionals, almost all, did not call for Trump to win the election. There were a few out there, but even the ones that predicted Trump would win didn’t really predict the rally in the market,” he said.
Now, Ragan noted, “President Trump is going to be the change president. Whether you like the policies or not, things are going to get done. It’s not going to be smooth. There’ going to be debate along the way, but things are going to get done. And I think the market has reacted positively to that growth message.”
He identified financials, banks, telecom, industrials, energy and material as the winners of the rally. On the other, consumer staples, utilities, technology and healthcare lagged.
“There’s some fear that interest rates could choke off the economic recovery, but we think it’s happening for the right reasons. Interest rates rightfully can go higher when economic growth is there. By historical terms, the interest rates remain very low and it’s not bad for equities if interest rates are rising because the economic growth is accelerating,” he continued.
Ragan then dove into his market outlook.
“A lot of the optimism has been priced into the market, we believe, but we still think it’s a good environment for equities,” he stated, noting that 2,375 is his target for the S&P 500.
That would represent a six percent increase. Add a two percent dividend and, Ragan noted, that would amount to an eight percent return on the market.
“It’s nothing to get too excited about, but that’s a good solid return,” he shared.
“And we are now coming off of eight consecutive years of positive returns on the S&P 500. That’s not unprecedented,” he said, noting that similar periods of growth occurred in the 80s and 90s.
“We think it can continue because we’re looking for GDP growth to accelerate and we’re looking for earnings growth in the S&P 500 to accelerate as well,” he added. “We’re sitting in a position now where even before the election the economy was starting to improve better and now you have the growth expectation layer on top of that.”
He noted that consumer confidence had been picking up since the election and that the consumer spending will continue to drive the US economy.
“This is the data that should lead to sustained consumer spending and GDP growth in 2017,” he said of consumer confidence data from the University of Michigan, which he shared with the audience.
Business confidence is another important factor, according to Ragan.
“This increase was all post-elections. Businesses were not very optimistic even going through the third quarter. In fact, it had been a drag on GDP. If the economy even gets a modest amount of increased business investment, and that starts to kick-in in 2017, then all of a sudden there’s going to be an upside to all of the forecasts out there,” he said of an increase in the National Federation of Independent Businesses index of business confidence.
“If we get better business investment, we see upside to some of that outlook. We think that the economy can grow about 2.4 to 2.6 percent in 2017. So we’re not looking for this huge acceleration. Since the Great Recession we’ve been kind of at a 1.6 to 2.6 range over that seven-year period. So we’re just talking about moving to the higher end of that range,” he added.
Despite his positive outlook, Ragan said he sees potential risks.
“Trump has a lot of hairs on him in more ways than one. So the risks that we see: protectionist trade policies could derail some of the growth expectations. If the GDP growth is not trending at that two-and-a-half plus percent rate, I think that’s going to take some of the optimism out of investors,” he explained.
Additionally, he noted, “When the dollar gets stronger that does make it a little harder for S&P 500 companies, who tend to export a lot. It makes it harder to generate strong earnings.”
Overall, however, “We do think the positive far outweigh the negatives,” Ragan said.
Ragan, who has 25 years of experience in the financial world, was introduced by former San Marino resident Andrew Crowell, who is the vice president of individual investor group at D.A. Davidson.
Crowell graduated from San Marino High School in 1983 and Stanford in 1987. He was also a Rotary International Scholar.
He joined D.A. Davidson when Crowell, Weedon & Co., founded by his grandfather, merged with D.A. Davidson three years ago.
