Broker Check

January 2017 market and economic review and outlook

| January 18, 2017

Risk assets were up for the fourth quarter to finish the year in strong positive territory. Although 2016 began with a steep double‐digit market decline, markets rallied after hitting a bottom on February 11 and credit conditions steadily improved. Trump’s surprise victory further served as a springboard for positive momentum due to anticipation of pro‐growth policy initiatives such as increases in infrastructure spending and a more benign regulatory environment. Low unemployment and positive economic growth spurred the Fed to resume its interest rate normalization policy, raising interest rates by 25 basis points on December 14. Both inflation expectations and interest rates are likely poised higher as we enter into 2017.

We remain positive on risk assets over the intermediate term, although we acknowledge we are in the later innings of the bull market and the second half of the business cycle. While our macro outlook is biased in favor of the positives and recession is not our base case, especially considering the potential of reflationary policies from the new administration, the risks must not be ignored:

  • Reflationary fiscal policies: With the new administration and an all‐Republican government, we expect fiscal policy expansion in 2017, including tax cuts, repatriation of foreign sourced profits, increased infrastructure and defense spending, and a more benign regulatory environment.
  • Global growth improving: U.S. economic growth is ticking higher and there are signs growth outside of the U.S., in both developed and emerging markets, are improving.
  • Global monetary policy remains accommodative: The Federal Reserve is taking a careful approach to policy normalization. ECB and Bank of Japan balance sheets expanded in 2016 and central banks remain supportive of growth.

However, risks facing the economy and markets remain, including:

  • Administration unknowns: While the upcoming administration’s policies are currently being viewed favorably, uncertainties remain. The market may be too optimistic that all of the pro‐growth policies anticipated will come to fruition. We are unsure how Trump’s trade policies will develop, and there is the possibility for geopolitical missteps.
  • Risk of policy mistake: The Federal Reserve has begun to slowly normalize monetary policy, but the future path of rates is still unclear. Should inflation move significantly higher, there is also the risk that the Fed falls behind the curve. The ECB and the Bank of Japan could also disappoint market participants, bringing the credibility of central banks into question.

The technical backdrop of the market is favorable, credit conditions are supportive, and we have started to see some acceleration in economic growth. So far Trump’s policies are being seen as pro‐growth, and investor confidence has improved. We expect higher volatility to continue as we digest the onset of the Trump administration and the actions of central banks, but our view on risk assets remains positive over the intermediate term. Higher volatility can lead to attractive pockets of opportunity we can take advantage of as active managers.

This entry was originally posted in Brinker Capital’s blog. Brinker Capital provides this communication as a matter of general information. Portfolio managers at Brinker Capital make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions. Neither Glenn McKinney nor Lincoln Financial Securities are affiliated with Brinker Capital.