The markets have continued their run from the end of 2016, and while we are richly valued, we feel there are economic reasons that justify the recent ascent. Compound the global economic rebound with the “deep breath” investors have now taken after the election, and it translates into a good environment for the markets. Some of the positives we are seeing are:
The market has been on a great run and we certainly welcome the growth. That said, we are priced to perfection and starting to see a few cracks in the internals of the market. After such a big run, we would expect a normal correction in this time frame. There is a strong economic justification for our recent run and we believe any correction in this time frame would eventually give way to higher prices later in the year.
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:
HAPPY NEW YEAR!