Download US Economy As we embark upon another New Year, the US

US Economy
As we embark upon another New Year, the US economy continues on a slow-but-steady growth
trajectory. This year, new leadership in Washington is likely to promote policies that aspire to jumpstart economic growth including cutting taxes and reducing regulations. Yet, such significant and
complex undertakings surely will not happen overnight. When the final numbers are tallied, we project
that the US economy grew by about 2% in 2016, and expect slightly higher growth for this year.
Throughout this recovery, inflation has remained subdued, but that could change. We anticipate that
inflation could rise modestly this year, moving closer to historical levels. Unemployment in the US could
continue to ease and workers’ wages could continue to increase. To keep pace with rising prices and
incomes, we anticipate two rate hikes from the Federal Reserve by year-end. These factors could help
bolster 2017 economic growth and corporate earnings.
US Markets
We saw the US equity markets perform well during the month of December. November, December, and
January, historically, have typically been the three best months out of the year, as this is a period when
consumers tend to spend the most money. So far, November and December of 2016 have proven to
have followed this historical trend. We believe the bulk of the recent upside is in response to an
improving US economy, lower unemployment, rising wages, a solid housing market, rising consumer and
business sentiment, along with the incoming administration, which many investors view as marketfriendly. We believe these positive economic fundamentals could continue to boost market
performance as we move into 2017.
Fixed Income
The Federal Open Market Committee (FOMC) met in December and as anticipated, raised interest rates
one-quarter percent to 0.50 – 0.75%. Looking ahead, our year-end 2017 federal funds rate target is 1.00
– 1.25%. We continue to expect the FOMC to raise rates at a gradual pace in 2017. Even after turning
higher following the US presidential election, FOMC five-year forward inflation expectations remain at
low levels, offering what appears to be a good anchor for 10-year US Treasury yields. Ten-year Treasury
yields also rose after the election, but we expect them to end 2017 near their current levels.
We anticipate that fiscal uncertainty and, occasionally, stronger-than-expected inflation may spark yield
volatility next year. Yet, as noted, our targets suggest that longer-term yields should remain near
current levels – as we anticipate several long-term macro trends to support a low-rate environment.
These include A) global interest rates well below US yields in many countries could continue to support
domestic fixed-income markets as global investors seek higher-yielding assets. B) Significant government
Markin Mickelson Financial Group of Wells Fargo Advisors – 4935 Keystone Crossing – Eau Claire, WI 54701
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debt levels could limit the potential for sustained fiscal spending. C) Inflation expectations remain
muted – even as near-term inflation measures appear to edge higher.
International Markets
Data released from Markit showed that the Eurozone manufacturing purchasing managers’ index (PMI)
– a forward looking measure of business sentiment – rose to a three-year high in December. This data
comes on the heels of better-than-expected gross domestic product (GDP) growth in the 3rd quarter.
This brighter data comes as some of the currency bloc’s watchers at midyear expected the Eurozone
economy to slow given the UK’s June referendum vote to leave the EU (Brexit) – and as demand-driven
inflationary pressures remained tenuous. Nonetheless, consumer and business sentiment reaccelerated
during the second half of the year, while inflationary pressures steadily expanded.
We anticipate that the Eurozone economy will continue to expand at a measured pace in the coming
year, but we also expect geopolitics to act as a headwind to the region’s growth. How key negotiation
milestones surrounding Brexit develop could drive economic and market-participant behavior as
uncertainties rise and fall. As a result of the Brexit discussion, and upcoming elections in France and
Germany, we would anticipate greater unknowns to act as near-term drags on economic activity and,
potentially, on financial-market sentiment.
Commodities
Following price gains in 2016, we anticipate commodity-price gains to slow in 2017. We also suspect
that price volatility will abate relative to what we witnessed in 2016. As for the two most popular
commodities, gold and oil, we do not see much upside in either for the length of 2017. At this point, we
suspect gold and oil may begin settling into wide trading ranges, which could last for years.
For West Texas Intermediate (WTI) oil, our best guess at the range is $30 - $60 per barrel over the
coming years. $30 is the level at which we believe that oil production will come off-line, while $60 is the
level where we expect production will accelerate. To start 2017, we suspect that WTI will largely stick to
the higher end of that range, probably something in the $45 - $60 range, thanks to OPEC, which recently
began to defend global oil prices.
Gold at this point in the cycle could also be range-bound for at least the next few years. Our best guess
at the range is $1,050 to $1,400 per ounce. The $1,050 level was the low set during this bear supercycle, and it was reached in December 2015. If the typical bear super-cycle repeats its course, gold
prices could retest the $1,050 level multiple times before a new commodity bull super-cycle
commences. For 2017 specifically, we foresee a tight range of $1,150 to $1,250, and we suspect that
gold will spend most of its time in this range this year.
What Does This Mean To Me?
We believe that as we move into 2017, economic fundamentals should continue to help move the
equity markets higher. While we saw many bond investments pull back in November and December as
interest rates rose, we believe that 2017 could see a recovery in this asset class as investors become
Markin Mickelson Financial Group of Wells Fargo Advisors – 4935 Keystone Crossing – Eau Claire, WI 54701
715-832-6171 – 866-825-6171
www.MarkinMickelsonfg.com
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC.
accustomed to higher interest rates. Looking ahead, while we believe we could see increased volatility
this year, we believe the markets (both equity and fixed income) could end the year higher. In addition,
we are not forecasting a US recession for 2017.
Sincerely,
Michael D. Markin, CIMA®, CFP®
Managing Director – Investments
Patricia J. Markin, AAMS®
Financial Advisor
Chad E. Mickelson, CRPC®, CFP®
Financial Advisor
Clint A. Markin, CRPC®, CFP®
Financial Advisor
The opinions expressed in this letter are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. The letter
has been prepared for informational purposes only regarding your Private Investment Management (PIM) account and is not a solicitation or an
offer to buy any security or instrument or to participate in any trading strategy. Investing involves risk including the possible loss of principle.
Past performance is not a guarantee of future results and there is no guarantee that any forward looking statements made in this letter will be
attained.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC.
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Markin Mickelson Financial Group of Wells Fargo Advisors – 4935 Keystone Crossing – Eau Claire, WI 54701
715-832-6171 – 866-825-6171
www.MarkinMickelsonfg.com
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC.