Welcome to the Jan. 2 Monday Business Briefing, your private business intelligence digest from Insider Louisville. In this first edition of 2017, we recap the 2016 stock market, with a look ahead to this year.

Investors — unlike savers — enjoyed some pretty nice returns in 2016, but a local stock researcher worries the underlying economic fundamentals point to a stock market decline this year.

Pushed by low interest rates, an improving economy and the surprise election of the more business-friendly Donald J. Trump to president, the Standard & Poor’s 500 gained about 10 percent in 2016. The Dow Jones Industrial Average rose 13 percent, with more than half the gain coming after the election. The Nasdaq managed a 7 percent bump.

Winners and losers

While some Louisville-based companies — PharMerica, Kindred Healthcare, CafePress — suffered substantial stock price declines, others — Humana, Yum, Stock Yards Bancorp — easily outperformed the market.

John Roberts

“It was a pretty nice year,” said John Roberts, director of research at Louisville-based wealth management firm Hilliard Lyons.

Shares of Humana closed at $204.15 on the year’s last trading day, up 14.5 percent for the year — though the gains occurred after the election of Trump, possibly reflecting the president-elect’s pledge to repeal the Affordable Care Act.

Humana and some other large insurers have said that the customers they have gained through the ACA have required more expensive medical care than they’re paying in insurance premiums. Humana said in its third quarter report that it projected to lose more than $300 million in 2016 from customers it had gained through the ACA.

Through Nov. 7, the day before the election, Humana’s shares were down nearly 2 percent for the year.

Humana 2016 stock chart | Courtesy of Nasdaq

The insurer’s stock price had plunged in July, when the U.S. Department of Justice announced that it would challenge the proposed merger with rival Aetna. But shares recovered quickly, making up the government-lawsuit-induced decline in a matter of weeks. A ruling on the case is expected this month.

Kindred, PharMerica happy to exit a turbulent year

Two other local health care industry stocks had a terrible year, at least from a share price perspective.

The share price trajectory of Louisville-based hospital and nursing home operator Kindred Healthcare was already heading downward when it plunged in early November after the company announced a $685 million third-quarter loss. The share price spiked in mid-November when Kindred announced a $700 million deal to help it exit the skilled nursing facility business.

And although shares have recovered somewhat since the presidential election, at $7.88, they are still down 33 percent for the year.

Shares of PharMerica had an abysmal first quarter, falling 43 percent, to $19.99, through March 17 before recovering — through four peaks and valleys — to near $26. Shares rose about 11 percent in November after the election and after the pharmaceutical services provider reported significantly higher profit on slightly higher sales. For the year, shares are down 28 percent.

PharMerica 2016 stock chart | Courtesy of Nasdaq

Roberts said that in a growing economy investors tended to stay away from more defensive industries such as health care and staples (think Procter & Gamble) and instead put their dollars more into cyclical industries, such as consumer goods.

The rationale: When the economy improves and people have more disposable income, they tend to spend more on trips and electronic gadgets. Shares of electronic goods company Best Buy, for example, rose about 40 percent in 2016. Those of casino/hotel company Wynn Resorts jumped 25 percent. And Nvidia Corp., which makes graphics processing units for computers, especially gaming rigs, saw its shares soar more than 200 percent in 2016.

While Yum Brands (+21 percent) and Papa John’s (+53 percent) outperforming the markets last year, Churchill Downs underperformed, gaining only 6.3 percent, or slightly more than consumer staples giant Procter & Gamble.

Shares of Louisville-based distiller Brown-Forman fell, then rose early in the year to $51.39 — adjusted for the stock split — up 3.5 percent. Shares hovered in the upper $40 range for much of the year, rose above $50 in August, but then fell to around $45 in early September. The company had said in its first-quarter report on Aug. 31 that revenue and profit had fallen because of the strong dollar and weakness in emerging markets.

On Dec. 30, the distiller’s shares closed at $44.96, down 9.4 percent for the year.

Low interest rates give banks a lift

Local bank stocks fared well last year, as low interest rates prompted more confident consumers to take out loans for cars and homes, and enticed more developers to borrow money for construction projects.

Shares of Stock Yards Bancorp last year gained 86 percent, while Republic Bancorp and Porter Bancorp rose 50 percent and 72 percent. Shares of the financial corporations were doing well through October, with investors expecting continued rate hikes by the Federal Reserve. As rates climb, borrowing costs rises — but the spread between what banks have to pay to borrow money and what they can charge to lend money also increases, Roberts said. And that means a higher earnings potential for banks.

Stock charts of Louisville-based financial corporations Stock Yards (yellow,) Porter (brown) and Republic blue. | Courtesy of Nasdaq

Bank stocks got another boost from the presidential election. Shares of Stockyards, Republic and Porter all have gained more than 20 percent since Nov. 8. Roberts said investors expect Trump and the GOP-controlled U.S. Congress to alter some post-recession bank regulations that have increased financial corporations’ operational costs.

Investors in two other Louisville-based companies did not fare so well last year.

CafePress 2016 stock chart | Courtesy of Nasdaq

While CafePress had a busy year — it moved into a new Louisville HQ — it also continued to struggle financially, resulting in layoffs announced in December. The e-commerce company’s stock had some wild swings early in the year, falling 18 percent, from $3.80 to $3.11, within five days after Jan. 12, before swinging back to $3.70 three days later. Between early April and mid-May, around the time that CafePress posted a $3 million first-quarter loss on declining revenue, shares fell another 19 percent and then hovered around $3.05 for the much of the rest of the year. Shares ended the year at $2.94, down 23 percent.

Shares of Sypris Solutions experienced some volatility early in the year, but hovered around $1 from late summer to early December. Shares had fallen slightly since the company announced it would close its automotive and commercial vehicle manufacturing plant in West Louisville. They closed the year at 88 cents, down 19 percent.

Shares of two large Louisville employers — but not based here — moved in opposite directions last year. Ford Motor Co. saw its share price fall 14 percent, while logistics giant UPS recorded a gain of 20 percent.

Outlook for 2017 points to a dip in stocks, but an opportunity in bonds

Roberts said that he has not finalized his projections for 2017, but at this point he expects the Dow to gain early in 2017, but ultimately to fall to about 19,000 or 19,500 by the end of the year. That would mean a decline of about 4 percent.

Roberts said that while he does not yet see any clear signs of an impending recession — even though the current expansion is the second-longest in history — he remains worried.

Markets have posted gains for two years now, despite company profits declining slightly, he said.

Roberts said he expects earnings for companies in the S.&P. 500 to be lower this year than the generally projected 10 percent, which would disappoint investors.

As interest rates rise, and, along with them, bond yields, bonds become a more attractive investment opportunity, especially in competition with stock dividends, he said. Higher bond yields may entice some investors to move out of stocks to reduce risk.

In addition, he said, investors likely also will react with displeasure if expected business-friendly legislation from President Trump and the Republican-controlled U.S. Congress fails to arrive.

“My worry,” Roberts said, “is that a lot of that a) will not go through, b) may not go through in the form that the markets might be expecting and c) might not have the impact that the markets are hoping for.”

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Boris Ladwig
Boris Ladwig is a reporter with more than 20 years of experience and has won awards from multiple journalism organizations in Indiana and Kentucky for feature series, news, First Amendment/community affairs, nondeadline news, criminal justice, business and investigative reporting. As part of The (Columbus, Indiana) Republic’s staff, he also won the Kent Cooper award, the top honor given by the Associated Press Managing Editors for the best overall news writing in the state. A graduate of Indiana State University, he is a soccer aficionado (Borussia Dortmund and 1. FC Köln), singer and travel enthusiast who has visited countries on five continents. He speaks fluent German, rudimentary French and bits of Spanish, Italian, Khmer and Mandarin.