A February Overview

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 latest data suggest that global trade growth picked up at the end of last year and business surveys suggest that it remained strong in January.  Specifically, the global Purchasing Managers’ Index (PMI) suggests we could experience 3+% GDP growth this year.  
  • Trade volumes rose in both advanced and emerging economies at the end of last year.  The annual growth rate of exports from emerging economies improved in December.   The improvement was evident even after smoothing out month-to-month volatility.
  • Sometimes it’s the “little” indicators that matter.  Alternative measures are significantly more upbeat. For example, the number of containers passing through the world’s ports and the volume of air freight have both surged recently.  
  • President Donald Trump seems to have toned down his protectionist talk, which puts other countries at ease.  He has placed less emphasis on the punitive tariffs on imports from China and Mexico that he spoke of on the campaign trail.

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. 


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. 


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