Investment Insights: New Year’s resolutions

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

It seems that equity market investors have committed to at least one resolution for 2017: Stay positive. We will ultimately see if markets will hold steadfast or let it fade away like so many of our own New Year’s promises.

Young business man in home office, smiling as he checks his phone.The first week of trading has been a nice start to the year for most markets and a welcome change from last year, when the opening seven days of trading saw the S&P 500 Index drop 5.83%. International markets were also down in the first week of 2016 with the MSCI EAFE Index and MSCI Emerging Market Index declining 6.71% and 8.90%, respectively. The slide that started at the beginning of last year finally came to a halt for the S&P 500 on February 11 after dropping 10.27% – enough to technically qualify as a correction. The index did eventually retrace and ended 2016 in the black, continuing the bull market which began 94 months ago and has seemingly endured into 2017.

This year has been almost the complete opposite and, in fact, it’s hard to find a major market which isn’t positive at the start of this year. From holders of gold, which has gained in price due to rising inflation expectations and increasing geopolitical risks, to bond investors, who have actually seen rates decrease this year, the tone of the markets seems to be “up.” The world seems to be syncing up into an economic rebound scenario despite the myriad of different monetary and fiscal policies, geopolitical concerns, and economic fundamentals across the globe. Equity markets from the U.S. to Europe, China, and reaching all the way to some frontier countries have recorded strong positive return numbers.

Despite the current rosy mood, there are still notable risks both domestically and abroad. Current earnings expectations compiled by Bloomberg for the S&P 500 sit at 10% growth for 2017. The same data shows earnings growth of that magnitude this late in a recovery would be quite a feat and an unprecedented first. While this earnings growth is possible, equity investors may be a little too ambitious on the effect of the upcoming fiscal policies. The Global Investment Management team does not doubt that the proposed tax breaks for corporations and for some U.S. consumers will aid in the recovering earnings expansion, but we take a bit more of a cautionary tone with these forecasts. As such, we continue our evaluation of the U.S. market and remain slightly overweight to larger, broader companies with more diversified revenue streams versus smaller and more mid-sized corporations.

Internationally, green shoots are showing in areas like France, Spain, and Germany. Spain’s most recent reading for November industrial production showed expansion of 1.8% month over month, far exceeding expectations of 0.4%, according to Bloomberg. France and Germany also had positive industrial production reports for November which, along with increased business confidence in both countries, should provide for a stable GDP report for the fourth quarter. Fundamental improvements in the three largest economies within the European Union bode well for lower unemployment, more consumption, and stabilized growth for a region that hasn’t been able to find much footing in this recovery. Monetary policy measures will likely continue to be accommodative abroad and should provide for additional positive earnings for corporations within the Eurozone. Our strategies remain overweight to international developed large-cap stocks.

For now, we continue to be marginally overweight equities in our portfolios, with the expectation that we could see some volatility in the first half of the year and perhaps even a correction in some equity markets. Corrections are a healthy part of a continuing bull market, allowing for sideline investors and cash to be invested into the marketplace as long as economic fundamentals remain positive. Currently, we see a low probability of a downturn on the economic front in the near future, but there are worries about the financial markets. An even stronger U.S. dollar, a major geopolitical event, or a quicker-than-expected tightening of monetary policy could exacerbate moves in the markets.

Chart showing market returns as of 1/10/17

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.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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