What’s Past isn’t Prologue So Far in 2017


January 24, 2017 [2017, Markets, Politics, Economy]
Charles Roth

Markets kicked off 2017 with a bang, especially overseas equities. The optimism isn’t misplaced, though global economic growth may fall short of forecasts, and volatility still lurks. Fundamental research and time usually help more than trying to time the market.

Markets this year have gotten off on the right foot. Over the first three weeks of 2017, the S&P 500 Index added 1.3% to its 12% gain in calendar 2016, while the Bloomberg Barclays U.S. Aggregate Index was also a smidgeon higher (0.03%), following its 2.65% total return last year. International stocks are also cruising higher to start this year, especially emerging market equities. What a contrast with the first three weeks of 2016, when global equities fell off a cliff and the U.S. Agg, as the benchmark debt index is known, shot up 1.07%.

Investors would likely be wrong, however, to expect the current market tone of low volatility and gradually rising asset prices has been set for the year. Although 2016 began with a market hurricane, the troubled waters calmed over the second quarter after the U.S. Federal Reserve made clear it wouldn’t rush a second rate hike following its December 2015 increase, China demonstrated it would avoid any more substantial devaluations in favor of gradual depreciation of its over-valued yuan, and corporate earnings started to show some growth. Volatility, however, resurfaced in June on “Brexit,” the U.K.’s unexpected vote to exit the E.U., throwing global markets for a loop, if only for a few weeks. As economic data in the U.S. and elsewhere began firming, market rotation from defensive positioning to cyclical investments more geared toward growth ensued in the third quarter, and accelerated in the fourth in the wake of Donald Trump’s electoral victory in November. Quite a roller-coaster year.

Is the current optimism misplaced? “It’s probably not,” says Thornburg CIO Brian McMahon in a 2017 outlook Q&A. “There should be more growth following through, but maybe not as much as the optimists hope.” Volatility will likely also reappear. On the political front, the election schedule is packed in Europe, with Dutch, French, German and possibly Italian voters pulling levers amid a rising tide of support for populist, nationalist parties. And on the economic front, benchmark interest rate differentials are also growing, as the market girds for expected hikes by the Fed while anticipating continued quantitative easing, ZIRP (Zero Interest Rate Policy) or NIRP (Negative Interest Rate Policy) in Europe and Japan. That said, 2016 was heavy with volatility, “and equity markets still delivered pretty good performance in the U.S.,” though a bit more mixed returns in dollar terms outside the U.S., McMahon adds.

Political events are hard to call, and the market responses to them are often even harder to predict. Italian stocks, for example, went up, not down, after Italy’s reform-minded, former prime minister, Matteo Renzi, resigned in response to Italian voters’ rejection of his constitutional revamp in a December referendum. The point is, investors can usually do better by focusing more on microeconomics and the fundamentals and valuations of individual securities, and less on macro events. Presidents and prime ministers come and go. But, “at the ground level,” McMahon points out, “people still wake up and go to work…and at the end of the day I feel pretty good about having them working for us, through our ownership of their companies’ stocks.” Rather than trying to time the market around political events, people will make the most money in sensible, attractively priced investments over time.

In the Q&A, McMahon and senior advisor Bill Fries discuss the state of economies in the U.S., China and Europe, along with the prospects for meaningful reforms, including the “burden of delivery” that now rests upon Trump and the Republican majorities on Capitol Hill. They also hit the prospects for fixed income and equities, both domestic and foreign, as well as the intra-sector dispersion between them; the outlook for oil prices; and the opportunity in store for active managers as liquidity conditions in the U.S. look set to tighten.


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