Investment Insights: Trumping monetary policy

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Evening street-shopping scene, with strings of holiday lights suspended over the sidewalk.Black Friday marks the beginning of the holiday shopping season and, when analyzing the preliminary shopping numbers, it appears to be getting into full swing. The National Retail Federation (NRF) forecasted that almost 154 million Americans entered stores and shopped online over the weekend, which was on par from last year. E-commerce versus brick-and-mortar sales has been a growing trend for shoppers, with NRF data reporting 5 million more consumers shopped online compared to last year, while retailers saw 3 million fewer in-store shoppers. Overall, online sales are expected to grow more than 10% from last year reaching $3.4 billion, according to Adobe Digital Insights.

President-Elect Donald Trump and his office have stepped up their selection efforts for cabinet members in the new administration over the past month. While the markets have not seemed to have any direct reaction to most of these interviews, the so-called “Trump trade,” where equities rallied after the results of the presidential election, took a brief misstep on Monday with the S&P 500 Index declining 51 basis points. While stocks continue to fluctuate at record levels, there may be some additional support for prices going forward.

As expected, the transition to fiscal stimulus from monetary stimulus has arrived with a new administration, as evidenced by Trump laying out infrastructure and tax-cut plans that may light a fire under the U.S. economy. The Organisation for Economic Co-operation and Development, an intergovernmental economic agency, stated that global growth will increase faster than expected due to the new policies and believes the added fiscal support will boost U.S. GDP growth by 0.5% and 1% in 2017 and 2018, respectively. The same group expects the U.S. economy to grow by 2.3% and 3.0%, respectively, over the next two years. Given the Bureau of Economic Analysis has updated its third quarter estimate for domestic output to a 3.2% annual rate, these predictions don’t seem too far-fetched.

While we are anticipating more activity and trading volume in 2017, the remainder of 2016 still may hold a few surprises. Crude oil tumbled yesterday before OPEC’s official meeting in Vienna today (Nov. 30) as markets speculate which announcements may arise from discussions. The group will be deliberating over much-anticipated production cuts, which had gained support a few months ago before a recent breakdown in talks. The Fed’s meeting in December will likely be much less opaque. In fact, fed funds futures data shows a 100% probability of a rate hike at the December 14 meeting, according to Bloomberg. The combination of GDP growth, futures data, and prepared remarks Tuesday by the Federal Reserve Governor Jerome Powell — regarding a strengthening case for a hike — has resulted in rates increasing materially along the curve.

We have shifted our strategies to capture gains within the domestic small and mid-cap stock asset classes, while adding duration to bonds. We remain below benchmark duration, although we believe an increase is warranted given global rates, a potential rotation in dividend stocks, and political risk both here and abroad.

Chart various market returns as of 11/29

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

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