As is probably always the case in election years, it’s difficult to look back at the entire year without the picture being painted in large part by the election. And unsurprisingly, it also sets the scene heading into the New Year. Whereas investors approached 2016 with apprehension, 2017’s entrance has been one of unexpected hope. We aren’t as unabashedly convinced as the market might suggest, but we’re staying tuned.
In the aftermath of the election, some sectors of the equity markets have responded in a manner that former Federal Reserve Chairman Alan Greenspan once characterized as “irrational exuberance.” We can at least characterize some of the recent market performance as speculative. The stock market did hit all-time highs in November; however, the S&P 500 was down preceding the election and finished the month up only 3.7%, while the perception was that it finished the month having performed much better than that. H&R stocks were up in the month of November, but bond prices were down nearly as much, negating the outperformance in many cases, especially for balanced clients.
There seemed to be a renewed sense of optimism from investors in the last couple months of 2016, but it remains to be seen whether some or all of the pro-growth policy statements alluded to during the presidential campaign will actually materialize. Further, it remains to be seen whether or not these policies will have the same positive economic impact that they may have had in previous historical presidential cycles. There is little doubt that reducing marginal tax rates at both the individual and corporate levels is economically stimulating, but there are caveats. While the market has been euphoric about potential prospects for growth, and some people are drawing parallels to the potential that was realized during the 80s, we think it is premature to extrapolate a path for economic growth based on campaign promises until there is more evidence of what is real. There are too many different factors at play (debt to GDP, for example, which is more than three times higher now than what it was in the early 80s under President Reagan, as well as differences in the role of the Federal Reserve) to draw dramatic conclusions about the economy today based on history. There is also potential danger in heading into a new year with such high expectations and optimism because that means, naturally, more room for downside surprise. History does, of course, offer interesting perspective and food for thought, given that patterns do sometimes emerge, but we must stay disciplined in our approach and rational about the current real prospects for economic growth.
Given that Donald Trump did not win the popular vote, and his presidential victory was a surprise to many, one might expect to see consumer confidence down, as well as other indicators. However, the aforementioned ideas and stock market rally (and an impressive unemployment rate at 4.6%) are probably part of the reason for the recent uptick in the reading. However, we’re holding our breath as 2017 settles in and the market begins digesting actual events rather than potential ones.
Let Us Not Forget
We, of course, remember that despite recent market rallying, much of 2016 was witness to volatility in the markets due to China’s stock market sell-off in the beginning of the first quarter, Brexit concerns, unimpressive oil prices for most of the year, and finally, the political trail leading up to the election. Early on in 2016, the S&P 500 was down over 10% (a technical correction), but the year ended with the market up over 9.5%. Therefore, the exuberance felt of late by many seems to be based off spirit more than true fundamental evidence. We know that the market responds to news and perception with nearly the same intensity as it does to fundamental data, but the underlying economy holds the most clout and is still the most important thing at the end of the day.
What's In Store
We’re anticipating a 2017 whereby value is still favored over growth. This has been reflected in our investment approach for a while now, and we’re still confident moving in that direction. At the individual stock level in this market of names, we’re doing more to analyze growth potential and stock price momentum of each stock itself and are being sure to capture wide sector exposure at this late stage of the market cycle. Although there are fairly valued stocks posing opportunities for investors, many stocks are expensive with less appealing valuations (something you may hear often in market rhetoric as of late). Therefore, we expect earnings to continue to play a very important role in stock performance and, hopefully, stock market growth. While we remain cautious about oil given that demand hasn’t changed much, the global supply of oil has begun to balance out, and it’s being positively reflected in the energy sector as well as for commodities. We expect volatility to continue, though.
Consensus is that we are on track for relatively flat real GDP growth here at home, after 2016’s growth of around 1.6%. Are you sick of “slow and steady” as a mantra yet? Let’s hope not, because it’s still very much alive as a characterization of yet another year for the US economy. According to Evercore ISI company surveys, growth isn’t likely to take off anytime soon, although inflation is anticipated to pick up (something we are closely monitoring). President Trump’s expansionary policies (deregulation, tax cuts, infrastructure expenditures), if enacted, would prove positive and significant for our economy; but again, if enacted is the key phrase.
However, global growth is positive and may even be accelerating, as evidenced by manufacturing PMI increases in Japan and composite PMI increases in the U.K, Eurozone, and China. And it is no surprise that the European Central Bank, Bank of England, and Bank of Japan are continuing to increase their countries’ balance sheets and stimulate their economies, as well, adding to growth on a global scale.
Geopolitically, as we mentioned last quarter, next year will see national elections in the Netherlands, France, and Germany. The general election takes place in the Netherlands in March, France’s presidential election begins in April of 2017, and Germany’s parliamentary election will be in late summer or early fall of 2017. These types of events are generally surrounded by uncertainty, as was the case with our own presidential election. And although it’s been a relatively silent issue of late, we’re likely to hear more about Brexit next year as the logistical details of what has so far been a theoretical concept are hashed out. Things are still fragile for Europe, to say the least, so we are remaining cautious but hopeful about the region.Our Perspective
© 2017 Howe and Rusling, Inc.