Fourth Quarter 2016 Update

January, 2017

Key Points

• The markets are looking favorably on improving corporate sales and profits.
• If the trend toward higher wages continues, we should see increased consumer spending which can help extend the current economic recovery.
• While investors have benefitted from the expectation of new economic policies from the incoming administration, delays or failure to implement will have a negative impact on the market.

4^th Quarter Market Commentary

Had we told our clients last January we were certain that oil prices would double by year end, citizens of the United Kingdom would vote to leave the European Union and Donald Trump would be elected president (not to mention the cities of Cleveland and Chicago would end their multi-decade drought with major sports championships) they would likely have questioned our sanity and told us to raise cash in their portfolios!  However, investors shrugged off the headlines and the rapidly changing geo-political landscape and instead focused their attention on improving corporate sales/profits and a potentially better global economy in 2017.

Below, we’ve highlighted broader market returns for the 4^th quarter and 2016 year-to-date time periods:

Source: Thomson Reuters, Fortigent

Investment Outlook & Strategy (“I Need a Raise”)

Improvements in labor market indicators such as job growth and the unemployment rate are strong signals that the U.S. economy is continuing to improve.  One puzzling exception has been the sluggish rise in wages. Economic theory tells us that wage growth and unemployment are intimately linked— wage growth slows when the unemployment rate rises and wage growth rises as the unemployment rate falls. During the current recovery, wage growth has been stagnant while the unemployment rate has fallen. In fact, coming out the Great Recession, many employees felt lucky to still be employed, and the prospect of asking for a raise seemed laughable.  Recent data suggests that the historical relationship between wage growth and unemployment may be occurring.

The chart on the following page shows year-over-year wage growth in average hourly earnings (right axis) and the percentage of consumers expecting higher incomes (left axis).  While absolute levels remain below the prior peak, the trend is encouraging, particularly over the past 18 months.  Moreover, the percentage of consumers expecting higher incomes is at its highest level in a decade.  Workers certainly appear to be more confident in asking for a raise and we feel the probable increase in consumer spending may help prolong the current economic recovery.

Summary

During 2016, the equity markets offered robust returns but we think investors may have been the beneficiaries of some of the positive economic policy measures that have yet to be implemented by the Trump administration. If we are right in assuming that not every policy measure is implemented timely and with the provisions that investors are expecting, then markets will react negatively to these disappointments. The resulting increase in market volatility can be mitigated by steadily improving corporate sales/profits that we began to see during the 4^th quarter of 2016.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

St. Clair Advisors
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Mayfield Heights, OH  44124
TEL: 216.925.5670 | FAX: 440.646.1838
www.saintclairllc.com