The Gross Domestic Product (GDP) is a measurement of the output of the US Economy. Sixty Six percent (66%) of the growth of GDP is based on the amount we spend as consumers. Two thirds of that spending comes from disposable income (how much extra money we have after we meet our required expenses). Higher interest rates and higher oil prices will generally lower the amount of disposable income we have, unless it is offset by higher wages.
The market is currently trading at 17 times 2017 earnings, which is much higher than the long term average of 15 times earnings. If higher oil prices and higher interest rates persist it will most likely affect most Americans excess income. With the current market valuation trading at premium, this leads us to believe that there is limited upside in the short term return for equities; and we should expect a slight pull back. There is a caveat to this analysis and that is the Trump economic agenda.
If President elect Trump can push his agenda of lower taxes, reduced regulations, and repatriation of US corporate earnings held overseas, then earnings could potentially move higher than is currently predicted for 2017.
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