A January Overview
I, for one, am very thankful 2016 is behind us. Don’t get me wrong, the capital markets finished the year with solid gains. But, it was a year with volatility reemerging as the dominant theme. Perhaps the year’s silver lining is economic activity accelerated the second half of 2016 in the US and abroad. In fact, December US business surveys have risen to the highest levels since late 2014, which gives us hope for 2017.
We are expecting global growth to increase from 2.5% in 2016 to 2.9% in 2017. As well, our outlook is skewed to more upside risks, including a more expansionary fiscal policy in major developed economies. Additionally, we expect pickup in private investment as a result of improvements in sentiment and leading indicators. As always, there’s a downside risk. We feel the main risks lie in the potential for disruptive trade policy in the US, rising populism in Europe, and imbalances in China linked to rapidly rising debt and capital outflows.
The new administration will likely announce a package of infrastructure spending and tax reforms. The growth impact is still a bit cloudy, as it depends on the composition and timing of the package, as well, as the multiplier effect within the US and global economies.
One of the fundamental proxies we follow is market multiples. Most market multiples became stretched toward the later part of 2016. Typically, when markets trade “rich” the upside becomes pretty limited. But, there are several reasons we believe that may not hold true in our current environment. A few of them are:
- Risks are not one-sided, as there are several sources of potential upside surprise in the economy.
- Longer-term momentum signals are consistent with further upside.
- We see little evidence of equity market euphoria, a typical condition at market peaks.
HAPPY NEW YEAR!