January 2017 Market Update

Home/Market Update/January 2017 Market Update

January 2017 Market Update

2016 brought its share of surprises, from the Brexit vote and Donald Trump’s win, to the recent stock market rally. The beginning and ending to 2016 were characterized by an almost identical drop and rally. As the year began, investors feared a recession and deflation, and were uneasy over the Fed’s December 2015 rate hike. This uncertainty, along with overseas markets, produced a sense of apprehensiveness that resulted in a 10% drop in equity markets by February 2016. After that point, investors realized the economy continued to improve, corporate earnings rebounded as the oil markets recovered and the markets rallied as a result. The year ended with domestic indexes up and a number of positive economic indicators, showing that our economy is growing at a slow and stable pace.

For the fourth quarter, the S&P 500 was up 3.82% and the FTSE All World Ex-US Index was down -.99%; for the year ending December 31, the S&P 500 Index increased 12.0% and the FTSE All World Ex-Us Index increased 5.12%.

As we look to 2017, we see opportunities for continued growth, as well as questions that remain unanswered, such as: What policies will Donald Trump implement? Will OPEC keep its pledge to lower oil output? Is the wave of European populism over? How will China’s economy perform?

Capital Markets Review

January 1, 2016 – December 31, 2016 index returns

[1]:

 

S&P 500 (U.S. Large Cap): 12.0%

Russell 2000 (U.S. Small Cap): 21.3%

MSCI EAFE (Developed International Markets): 1.5%

MSCI EME (Emerging Markets): 11.6%

Barclays Capital Aggregate (U.S. Fixed Income): 2.6%

Barclays Global High Yield Index: 14.3%

Bloomberg Commodity Index: 11.8%

Trumponomics

Congress and President Trump have a long list of proposed items to implement which could affect the U.S. economy and investors; topics include reducing personal and corporate tax cuts, restricting immigration, increased spending on defense and infrastructure, and repeal and replace the affordable care act.

Without any changes to current tax and spending policies, the deficits are projected to increase over the next decade. This limits the amount that congress can implement on tax cuts and spending increases going forward.  A cut in corporate and personal taxes was highly publicized by President Trump throughout his campaign. While a personal tax cut may at first seem helpful to consumers, the resulting cuts would balloon our federal deficits and national debt over current projections. It is likely that any potential cuts may get pushed down the road and be smaller with limits on deductions; making them closer to revenue neutral than what was publicized on the campaign trail.

A cut in corporate taxes is a bit more complicated. In theory, a corporate tax cut would be a positive for corporate profits, and could promote investment spending repatriation of foreign cash reserves and overall help growth. However, what is proposed is not a simple tax cut. What is being discussed in congress is a tax based on where goods and services are consumed, not produced. This would disallow companies from deducting the cost of imports but would allow companies to fully deduct revenues from exports. This should help with trade deficits but it is essentially a hidden tariff which may push up prices for American consumers, resulting in inflation. In addition to driving up prices for American consumers, foreign countries would retaliate, offsetting most of the benefit.  A simple one-time reduction in repatriated cash along with a lower corporate tax with reduced loopholes would be more beneficial.

Though Trump has spoken a great deal on immigration, we do not believe that there will be mass deportations. Talks of building a wall on the Mexican border still exist and may be implemented, but it is important to note that there have already been significant declines in illegal immigration through deportation, policy changes and slow economic growth over the last decade. There is more of a risk of too little immigration going forward.  As baby boomers enter retirement, 80% of workforce growth over the next decade is projected to come from immigrants. Without them, our economic growth will decline further.

There have also been major discussions on increased defense and infrastructure spending. There are limits to how much increased spending can be accomplished without offsetting cuts elsewhere that have not been detailed. As a result, there will be little economic benefit on a macro basis.

Most analysts contend that the healthcare system still has a long way to go. Trump has said that he will get rid of Obamacare, but we do not yet know to what extent and what it would be replaced with. Caring for those with health problems and preexisting conditions is too expensive without forcing healthy people into the system.  It is likely that there will be some amendments to the Affordable Care Act, but it is unlikely that it will be completely repealed in the short term.

U.S. Economy

U.S. economic indicators remain solid, indicating slow but stable growth. Consumer sentiment and confidence is high. Real GDP increased at an annual rate of 3.5% in the third quarter of 2016, according to the Bureau of Economic Analysis. Total non-farm payroll employment increased by 156,000 in December, and the unemployment rate was little changed at 4.7%. In addition, December had an annualized 2.9% wage growth which was the highest since 2009. Corporate profits remain strong and will grow slowly in 2017. A rise in the U.S. dollar could put a drag on profits, but an improvement in the energy sector would more than offset this. We believe that due to this solid economic data and the increased prospects of inflation, the Fed will raise rates three to four times in 2017, following the raise in December 2016.

Consumer sentiment

Source: JP Morgan

It is possible that this will create a less friendly environment for U.S. government bonds and put upward pressure on the U.S. dollar. U.S. 10-year Treasury yields have risen by nearly 60 basis points since the election, but at 2.37% as of January 9, 2017, we expect the trend to continue. The U.S. dollar is already priced high and close to its 2002 peak. We believe it has some further upside potential, but this is limited by the relationship between the dollar and Fed tightening. More dollar strength will create a headwind and in our view make the Fed less aggressive, which could put downward pressure on the dollar[2].

In December, OPEC agreed to cut oil production by about 1.2 million barrels per day, or about 4.5% of current production, to 32.5 million barrels per day. Analysts hope the agreement will balance oil supply and demand in the beginning of 2017, since the market is currently oversupplied. Since the announcement, oil prices have increased, which means an increase at the pump for U.S. consumers.

Global Economy

Globally, manufacturing is solid, yet we still see some risks. The Eurozone continues to have good fundamentals based on improving economic growth, stimulatory monetary policy, improving earnings growth and attractive valuations. European populism is becoming more prevalent and there is a potential for more right wing nationalists to be elected. It will be interesting to see the outcomes of the Dutch elections in March, French presidential elections in April/May and German elections in September.

The Asia-Pacific region continues to deliver steady economic growth. The long downtrend in inflation and in official interest rates is coming to an end across much of the region, and we believe Asia-Pacific equity markets continue to offer moderately good value[3]. In China, credit growth and debt is unsustainable, and the world is waiting to see how it unfolds.

In the emerging markets, the outcome of the U.S. presidential election could weigh negatively. President Trump has supported greater restrictions on international trade, which, if implemented, are likely to hurt emerging market economies. However, we still view the emerging markets as an area of opportunity due to cheap prices.

Investment Thinking

Many investors did not expect global stocks and bonds to deliver positive returns in such a volatile and uncertain year. 2016 highlights the importance of diversifying across asset groups and regional markets, as well as staying disciplined despite uncertainty. Although not all asset classes had positive returns, a globally diversified portfolio logged attractive returns in 2016, as the chart below shows us. Investment research shows us that global markets are information-processing machines that incorporate news and expectations into prices. Investors are well-served by staying the course with an asset allocation that reflects their needs, risk preferences, and objectives. This can help investors weather uncertainty of all forms[4].

We continue to monitor the global economy and seek opportunities to invest in certain sectors and geographic regions given the current market environment. In our view, a long term investment horizon, asset allocation, diversification and discipline remain crucial to portfolio success. If you are a client and would like further detail on these topics or anything else, please call or email us. If you are not a client, but would like more information on Callan Capital’s wealth management services, please contact us at (858) 551-3800 or www.callancapital.com.

 

[1] JP Morgan, Guide to the Markets, January 2017, www.jpmorgan.com

[2] 2017 Global Market Outlook, January 2017, Russel Investments www.russellinvestments.com

[3] 2017 Global Market Outlook, January 2017, Russel Investments www.russellinvestments.com

[4] 2016 Market Review, January 10, 2016. Dimensional Fund Advisors

Important Index Descriptions and Disclaimers

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

INDEX DESCRIPTIONS:

The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website.

The past performance of an index is not a guarantee of future results. Each index reflects an unmanaged universe of securities without any deduction for advisory fees or other expenses that would reduce actual returns, as well as the reinvestment of all income and dividends. An actual investment in the securities included in the index would require an investor to incur transaction costs, which would lower the performance results. Indices are not actively managed and investors cannot invest directly in the indices.

S&P 500®: Standard & Poor’s (S&P) 500® Index. The S&P 500® Index is an unmanaged, capitalization – weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries.

Russell 2000 Index: An index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

EAFE Index: An index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in international index has been in existence for more than 30 years.

EME Index: An index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 21 emerging economies.

Barclays Capital Aggregate Bond Index: An index maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. It is an unmanaged index considered representative of fixed-rate, noninvestment-grade debt of companies in the US, developed markets and emerging markets.

Barclays Global High Yield Index: An index maintained by Barclays Capital.

Bloomberg Commodity Index: A broadly diversifiedcommodity price index distributed by Bloomberg Indexes.  It tracks prices of futures contracts on physical commodities on the commodity markets. The index is designed to minimize concentration in any one commodity or sector. It currently has 22 commodity futures in seven sectors.

DISCLAIMERS:

Nothing contained herein is intended constitutes accounting, legal, tax advice or investment recommendations, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument.  Callan Capital does not provide individual tax or legal advice. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. For more information, please refer to our most recent Form ADV Part 2A which may be found at adviserinfo.sec.gov.

Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to any error or omission is accepted.  This information should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein.  In addition the Investor should make an independent assessment of the legal, regulatory, tax, credit and accounting and determine, together with their own professional advisers, if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. The information presented herein is for the strict use of the recipient and it is not for dissemination to any other third parties without the explicit consent of Callan Capital LLC.

By | 2017-06-02T17:58:52+00:00 January 19th, 2017|Market Update|

About the Author: