Update Winter 2017

Turning a New Page

Ch-Ch-Changes
Seismic geopolitical events, most notably the Trump presidency and
Brexit surprises, marked 2016 as a game changer across the global
landscape, with significant implications for economies and markets.
Populist politics and anti-globalization sentiment have set the stage for
significant policy change in 2017 and beyond.
While there is still a great deal of uncertainty around final effects, some
of these changes will likely hasten shifts that were already under way
(interest rate normalization in the US, for example). Others represent a
significant departure from previous trends, such as an about-face on
free trade.
Volatility has been relatively low. However, episodic bursts of volatility
indicate the potential for more dislocation, as markets adjust to new
realities. The potential for further political tumult to impact markets in
2017 abounds. Elections in Germany, the Netherlands, and France will
be scrutinized for signs of populist and Eurosceptic influence, any
growth of which will unsettle markets in Europe. At the same time, the
region continues to grapple with the bumpy and uncertain path leading
to Britains exit from the European Union, with speculation as to the
nature and impact of subsequent re-arrangements of trade and
political relations.
Near-term, better economic growth, particularly in the U.S., should
occur as President-elect Trump is likely to deliver tax cuts and
infrastructure spending. Fiscal stimulus is likely to be a global trend as
politicians move away from austerity and take heed of the ballot box
messages delivered in the U.S. and UK. Longer-term, however, trade
protectionism could mean slower growth and higher inflation. There is
also the risk the Trump stimulus overheats the U.S. economy, resulting
in more Fed tightening and an economic downturn later in 2018 or
2019.
Global monetary policy divergence remains an important theme, and it
will likely be magnified by President-elect Trump. The Fed will likely
follow their recent December federal funds rate tightening with at least
two further hikes in 2017. Meanwhile, monetary policy in the UK and
Japan is set to remain very accommodative, and the European Central
Bank is likely to extend its asset purchases. The main investment
implications are a less friendly environment for U.S. government bonds
and upward pressure on the U.S. dollar.

On the corporate side, profits have recovered but dollar strength and
rising wage costs imply a moderate outlook for 2017 and beyond.
Economic growth is projected to come in at 2.5% in 2017, but could
trend higher with a boost from fiscal policy that is likely to kick in
towards the end of the year. The global economy has proven to be
quite resilient in the face of the recent unexpected developments. In
virtually every major region, the economy is now trending upward or
has at least stabilized.
Optimism, with a dose of caution
The now almost eight year old bull market in U.S. stocks is growing
long in the tooth, but the risk of it ending swiftly is low. Bear markets
tend to sniff out economic recessions and with growth accelerating
from its below-trend pace, the risk of that is also low. Sentiment-related
economic indicators have recently soared, including the stock market
itself, consumer sentiment, the Housing Market Index (HMI), and the
Small Business Optimism Index. In addition, bond credit spreads have
behaved well and the bond yield curve has generally steepened. All of
this suggests improving growth and low near-term recession risk.
The U.S. stock market should do well but the trajectory of gains will
likely not be as fierce as witnessed immediately post-election; and
bouts of volatility are expected for several possible reasons, including:

The transition to Trump's presidency

Inflation or growth could heat up enough that the Fed would have
to be more aggressive than expected in hiking interest rates
Continued U.S. dollar strength could tighten financial conditions
and hurt multi-nationals earnings

Looking forward, while many uncertainties exist in the economy and

markets, the fact remains that the U.S. economy is still expanding,
inflation and interest rates remain low and numerous companies are
still growing their earnings. Even in this challenged environment,
really strong market leaders continue to grow and increase earnings.

Amin Khakiani
January 19, 2017