Investment Insights: Excerpts from our Q1 strategy report
The following are excerpts from the Q1 2017 “Investment Insights” report, produced by the Global Investment Management team. For the full report, click here.The year of warm porridge
Everyone seems to be feeling pretty good about the economy and the markets, barring a sneaking suspicion about stock valuations. The Conference Board Consumer Confidence Index is showing U.S. households are the most optimistic they have been since just before the dotcom crash back in 2000 and above even the most confident times just before the Great Recession. While we don’t base much on sentiment, there might be good reason for consumers to be feeling so good. We believe the U.S., and most of the world, are in an economic sweet spot. The combination of low-to-no inflation, accelerating economic growth, and a recent uptick in wages has put consumers, and financial markets, in a “Goldilocks zone” – not too hot, not too cold.(Potential) policy, policy, policy
In the world of politics, risks in Europe have begun to fade. Far-right party candidates that, if elected, would seek to leave the European Union and instate much more protectionist policies have fallen behind or lost in recent polls. Issues like immigration and populism remain significant topics for many countries, but it seems financial markets have avoided a possible shock from another surprise result similar to that of Brexit. In the interim, U.S. policymakers continue to spitball potentially meaningful changes to policy and legislation, but have yet to take much action.
The Trump administration has been working feverishly to pass legislation that would repeal the Affordable Care Act and sign into law a new health care bill – with not much to show for it. The statutory process may be finally revealing the different bi-partisan obstacles to parts of Trump’s pro-growth agenda. We believe U.S. stocks have partially priced in the potential policy changes on the agenda like infrastructure spending, tax reform, and easing of regulations. However, not all bills are created equal and some of these policy changes will be harder to pass than others. With that said, a cut to personal and corporate taxes may be an easier sell to lawmakers and could be considered a quick win for both the administration and the stock markets. We will be keeping an eye out for that in the latter part of this year. The fiscal spending deal is likely much more up in the air and has been a driver to stock markets based on the expectation that fiscal policy would take the reins from monetary policy for higher economic growth. If there is a disappointment in the fiscal stimulus to the U.S. economy, stocks would likely react negatively to the news.One eye on earnings and the other on China
While we don’t necessarily believe the current equity rally is over, we have said the road ahead may be more difficult. One of the larger bumps in the road could be China. The Chinese economy has been a main driver for global growth over the past decades and has been seen as irrepressible due to consistent reported growth. Recent data, however, has shown a more worrisome story and growth figures may begin to moderate further. Typically, stock markets have been fairly unkind to any notion of big trouble in China – our group believes markets may use China as an “excuse” to correct given a large enough disappointment in forward-looking economic data.
Click here to read more of the quarterly “Investment Insights” report.
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