Going into 2017, headlines regarding fiscal stimulus and regulatory changes drove inflation expectations and equity markets higher. Gridlock in D.C. has dampened the reflation trade, but broadening global economic growth and a rebound in corporate earnings have more than offset this disappointment.
Pictures can tell a thousand words…
Year to Date Returns
Improving consumer and business confidence (“animal spirits”) plus a rebound in corporate earnings have lifted markets higher in 2017.
Global economic growth has picked up supported by monetary policy, improved business and consumer spending, and low, steady inflation (no deflation!). That’s likely to continue. China has stabilized its reserves and their economy has surprised to the upside.
It’s not a bubble! But we are in the late innings of a long multi-year rally. The stock market has already priced in good news from corporate earnings leaving little room to absorb unfavorable news should something unexpected happen.
Markets could get a bit bumpier in the remaining months of 2017 as political tensions are bubbling but risks to the economic outlook remain relatively calm. Still geopolitical worries over North Korea, Chinese debt levels, and elevated stock markets remain. Looming 2018 mid-term elections in the U.S. suggest intense pressure on Republicans to deliver on their tax reform agenda leaving some probability of further earnings support next year. At this stage in the cycle, it is important not to “reach for extra return.” Maintain a diversified, disciplined approach.
Brandy Niclai, CFA®
Chief Investment Officer