Michigan firms beat S&P 500 in 2016 market gains

Ian Thibodeau
The Detroit News

Higher third-quarter profits and a resurgent stock market after the Nov. 8 presidential election have helped 2016 end on a good note, while a solid economy going into the new year is tempered with uncertainties, experts said.

The Dow Jones Industrial Average closed Friday at 19,762.60, declining 57 points or 0.3 percent in light trading for the day. But it left the market up 13 percent for the year after a flat 2015, coming within 30 points of the 20,000 mark earlier this week.

Michigan’s 70 publicly traded companies averaged a 19 percent stock price increase, better than the 9.5 percent gain by the benchmark Standard & Poor 500 index, David Sowerby, portfolio manager for Loomis Sayles in Bloomfield Hills said.

Michigan companies fared well even though Detroit’s automakers did not have a very strong year in the market, he said. Smaller companies did better than large firms in 2016, and many of Michigan’s 70 companies monitored by Loomis Sayles are small or medium-sized.

It ran counter to the state’s experience that the auto industry’s performance often dictates how well Michigan prospers.

“The rest of the bunch had a solid year, especially financial firms,” Sowerby said Friday.

Midland-based Chemical Bank closed the year with a 58 percent increase after merging with Talmer Bank, the third highest gain among the Michigan 70. It trailed an 82 percent rise for Grand Rapids grocer SpartanNash and a 197 percent surge for Spartan Motors inc., a Charlotte-based specialty auto designer and builder.

The improvement nationwide and in Michigan could be traced to a comeback in corporate profits in the third quarter and the market surge following the presidential election of the Republican businessman Donald Trump, whose tax-cutting, deregulatory agenda can be passed into law by a GOP-led Congress, Sowerby said. The Dow Jones index has risen 7.8 percent since the election.

“The consensus seems to be we’re going to have a president who has talked about reduced regulation, which businesses often like, and lower taxes, which businesses often like,” said Charles Ballard, economics professor at Michigan State University. “What’s happened is that investors have latched onto things they believe will improve corporate profitability, and that would translate into greater demand for corporate stocks.”

Trump wants to cut America’s corporate income tax rate from the current average of 38.9 percent to 15 percent and ensure small businesses pay the same top rate as large corporations. He also promised to cut income tax rates for individuals and rein in agencies such as the Environmental Protection Agency that have increased regulations under the Obama administration.

“There is the statement that animal spirits are awakening ... after eight years or more of the needle moving toward more likelihood of the (increased) regulatory and tax environment,” Sowerby said.

Heading into 2017, investors seem to be more bullish on the market, he said.

“In the last month, I’ve seen more people selling their bond funds and buying their stock funds,” Sowerby said. “For the last three to four years, it has been the opposite. I’ve slowly seen a reversal.”

But Ballard and Sowerby caution there are too many “what-if’s” attached to a Trump presidency to accurately predict what could happen to the national economy. That unpredictability is compounded by similar political changes in China and Europe, Ballard said.

“I feel much less certain about things than the past four years,” Ballard said. “That doesn’t mean I’m predicting bad outcomes. ... I could see about a year from now we could be in pretty good shape. I just don’t know.”

The main threat would be if Trump follows through on campaign promises to increase tariffs and trade barriers, which would lead to a “global trade war, which would lead to a global recession,” he said.

In Michigan, increased tariffs on imports would hurt the auto supply chain between Michigan and Ontario, Ballard said. That trade route has thrived under the North American Free Trade Agreement that Trump has vowed to renegotiate.

“There are a lot of things that President-elect Trump talked about that might or might not happen that businesses don’t like,” he said.

Sowerby said if Trump follows through on threats to end the Trans-Pacific Partnership, it wouldn’t be a game changer for the stock market. Both Trump and Democrat Hillary Clinton said they opposed the TPP deal and wouldn’t try to get it approved by Congress.

Sowerby said it would take a more aggressive move similar to the passage of the 1930 Smoot-Hawley law — which increased tariffs on more than 20,000 imported goods, some by as much as 50 percent — to unsettle the stock market.

Although surpassing 20,000 on the Dow Jones index is within reach, any further growth in the market could be short-lived.

“For the first six months of 2017, the economy has enough momentum that it’s unlikely to be derailed, but I do see a lot of things that cause me concern,” Ballard said.

“Namely, no period of economic expansion has ever lasted longer than 10 years in the U.S. The country has seen seven years of growth and is approaching the end of that window.”

But Sowerby argued that a recession is not necessarily likely.

“Bull markets don’t die of old age,” he said. “They die because of mistakes — whether it’s excessive leverage in the housing market in 2006 (buying homes with nothing down), bad tax policy, bad monetary policy.”

Many times it is unexpected factors that lead to a recession, he said, citing a possible burst in inflation above 3.5 percent from the current level of less than 2 percent.

“I’d worry more about the Federal Reserve and price stability,” Sowerby said.

Despite the optimism that Trump and Congress will approve pro-business policies, investors may not get an immediate return on those developments. Overall, investors will likely see a small dip in profits next year, Sowerby said.

“For investors, 2016 is a solid B+,” he said. “2017, with what I know now, is shaping up to be a B, B-.”


Twitter: @Ian_Thibodeau