Investment Insights: Starting off on the right foot

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Flat road with "2017" painted on it leading into a vast horizon under a few dark clouds and sun peeking through.The S&P 500 Index jumped in the early morning hours yesterday before gradually declining over the trading day before a late rally; the index gained 85 basis points in the opening day of trading for 2017. The financial markets seem to be starting off the year on a positive note as investor optimism buoys markets.

The 115th Congress, now largely dominated by the Republican Party, convened for the first time yesterday with plans for laxer rules on taxes and regulation as well as to reduce spending on select government programs. The “Trump trade,” which has been a primary driver for the gains in equity markets over the past few months, continues to be driven by promises of deregulation and to clean up Washington. While they may be in the incoming President’s crosshair, policymakers are stepping into office on improving economic data.

Global manufacturing numbers are being published for December, and the data is looking good. U.S. and Chinese manufacturing posted better-than-expected figures for the month, and the world’s two largest economies have been showing increasing output in the trailing several periods, according to Institute for Supply Management and Caixin data. Output in the U.K., despite lower forecasts due to the Brexit, rallied in December as the Markit U.K. Manufacturing PMI reached a reading of 56.1, the highest point since mid-2014. While markets aren’t counting their economic chickens just yet, some of the data is looking promising.

Though equity markets ended the inaugural trading day up higher, crude oil seemed to be struggling to add to its December price improvement. The U.S. dollar, on the other hand, continued its robust climb that started just after the presidential election. The USD rose 43 cents on Tuesday versus a basket of major currencies and is at its highest point since 2003, according to Bloomberg. It may continue to appreciate, as the Fed is expected to raise rates multiple times this year. While multiple hikes are more likely in 2017, it should be noted the Fed had made similar announcements the past two years and only raised the fed funds rate once each year.

2016 was an eventful year and saw investors questioning major themes in the markets, such as the future of U.S. economic and foreign policy, how much (or how little) the Federal Reserve will act this year, and what exactly the details may be with upcoming Brexit proceedings. We are looking to see if 2017 will have some responses to these questions as we closely monitor the markets for answers.

Chart showing various market returns, as of 1/3/17

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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.

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