The Verus Team

Election’s Over – Handicapping 2017 and the Opportunist?

Written by: Derek Majkowski. Any opinions are those of Derek Majkowski and not necessarily those of RJFS or Raymond James.

As we kick off 2017 and approach the much discussed upcoming Inauguration and change in Washington, many are left pondering how the year ahead will unfold.  The US stock markets, since the election, have performed extremely well, and many who have been invested in stocks have seen the value of their portfolios move up these past couple of months.  

As we digest all that has happened since the election, we can presume that a number of factors contributed to the recent positive move in the market, and may continue to fuel an upward bias. 

To begin, it was evident that leading up to the election, a good amount of cash sat on the sideline awaiting some definitive outcome.  Regardless of the election results, it was bringing closure to the craziness and rhetoric that we had been enduring for almost two years.  Despite opinions around the “who”, there was an overall sigh-of-relief that it was over, and funds went to work with the knowledge that there was now a definitive path forward, whether we agreed with it or not.

Speaking of path forward, another factor that presumably fueled the recent market upside, was the expectations of the pro-business policies and the potentially positive impact those changes may have for many US corporations.  This included the discussions around corporate tax reductions and overall tax reform.  In addition, the incoming administration spoke about less government regulation, and stimulating the economy by proposing fiscal projects in the future.  

All of the projections of lower taxes, less regulation, and expectations of future infrastructure spending, aided the recent US stock market rally.  This of course, says nothing about the recent reversal we have seen in interest rates (rising) and bond prices (lowering).  While stocks have generally responded to the pro-growth, pro-reform rhetoric and expectations, by moving higher in anticipation of economic expansion.  Bonds and fixed income instruments have seen the opposite action due to the potential inflationary cost of this growth, and the upward move in interest rates. 

The Federal Reserve made another move toward “normalization” by raising the discount rate again in December 2016.  This action, in addition to the future expectations of more hikes in 2017, places pressure on bond prices and fixed income instruments.  Where projections for an accommodative Fed seemed like commonplace indefinitely, the variables already mentioned herein quickly raise questions about the Federal Reserve’s ability to move as slowly as they had previously indicated, and perhaps hoped, with monetary policy.  This reality has also pushed funds into equities and out of interest rate sensitive positions these past several months.

What does this all mean as we enter 2017?

Well generally speaking, we should anticipate a consistent and similar theme throughout 2017 to that of which we have seen post-election.  But, as we have often seen with quick market and asset price movements, there is a move on expectation of things to come, and then there is often an adjustment, or reversal, following the reality of the event.  In the case of 2017, many are anticipating a regression to the mean following the quick and strong move since November 2016.  For those assets that are up in value since the election, a correction or consolidation in price is expected.  Those assets that have gone down since the election, may, in theory, recover or bounce higher in price after we get past the Inauguration on January 20th – technically the “event”.   This is obviously a simplification and generalization of behavior after quick aggressive moves in market prices, but it is certainly a “call” that a number of Wall Street firms and pundits are suggesting in the next couple of weeks.

Will that happen this time?

As my esteemed colleague George Shirley has pointed out in “Verus Team 2016 Year in Review and 2017 Predictions” article, we obviously have no idea what is ultimately to come.  What we do know however, is that we will have a new President of the United States, prices will fluctuate, policies will be pushed forward and debated, and we (The Verus Team) will be looking for investment opportunities and ways to help protect against the risks that can impact money and plans. 

We are seeing and further anticipating a shift in monetary and fiscal policy, and barring a “Black Swan” event, believe those shifts will continue to impact investment strategies, and planning considerations throughout 2017.  This, of course, is no different than any other year (the preparation for unknowns), but there seems to be a change in the winds, and future market behavior could be driven by different catalysts than those experienced the past several years.

Regardless of the direction of the markets in 2017 and the many unknowns before us however, I was struck by an opening to a recent article posted by Jeff Saut, the Chief Investment Strategist at Raymond James.  He began with the following old quote:

"Dear optimists, pessimists, and realists, while you were arguing about the glass of water being half full or half empty, I drank it!"

. . . The Opportunist

I think as we consider and debate the impact of change, and attempt to handicap 2017, or any year for that matter, it is human nature to take a position on the current events of the day and react respectively – positively or negatively.  From our point-of-view, we think objectivity, flexibility, patience, and discipline will rule the day as we prepare and embark on the year ahead.

Overall, we will be looking to be Opportunists...

 

This information does not purport to be a complete description of the securities, markets or developments referred to in this material.  It has been obtained from sources considered to be reliable, but we do not guarantee that the content herein is accurate or complete.  This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  There is no assurance that the opinions, statements or forecasts provided will prove to be correct.  Past performance is not a guarantee of future results.