Amy Magnotta, CFA, Senior Investment Manager
The dramatic market shifts in November were not for the fainthearted. Risk assets ended the month mixed with domestic assets posting strong positive returns and international assets generally negative. November began with risk assets in a steady downtrend but abruptly reversed in the aftermath of the Trump victory. Markets surged with the anticipation of Trump policy initiatives such as increased infrastructure spending, tax reform and less regulation. Expectations of increased economic growth coupled with rising commodity prices heightened fears of higher inflation and continue to fuel speculation of a Fed rate hike during the fourth quarter. As political and central bank policy continue to unfold, we expect heightened market volatility to continue. 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.
Our macro outlook is biased in favor of the positives and recession is not our base case:
- 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, and infrastructure spending, as well as a more benign regulatory environment.
- Global monetary policy remains accommodative: The Fed’s approach to tightening monetary policy has been patient. The Bank of Japan and the ECB remain supportive, and the Bank of England may need to join in response to the Brexit vote.
- Stable U.S. growth and tame inflation: U.S. economic growth has been modest but steady, and the reflationary policies discussed above should boost economic activity. Wage growth, a big driver of inflation, has remained in check.
- Constructive backdrop for U.S. consumer: The U.S. consumer should continue to benefit from lower oil prices and a stronger labor market.
However, risks facing the economy and markets remain, including:
- Risk of policy mistake: In the U.S. the subsequent path of rates is uncertain and may not be in line with market expectations, which could lead to increased volatility. Should inflation expectations 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.
- Slower global growth: Economic growth outside the U.S. is weaker.
- Risk of more protectionist trade policies: The new administration may impose tariffs and/or renegotiate trade agreements.
The technical backdrop of the market has improved, as have credit conditions, helped by the favorable macroeconomic environment. We have also seen some reacceleration in earnings 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 actions of central banks and the onset of the Trump administration; 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.
A PDF version of Amy’s commentary is available to download from the Brinker Capital Resource Center. Find it here >>
Source: Brinker Capital. Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. Indices are unmanaged and an investor cannot invest directly in an index. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Brinker Capital Inc., a Registered Investment Advisor.