If the market's new year's resolution was to continue 2016's upward trend, they are certainly proving to be disciplined and focused thus far. January was a strong month for virtually all markets, as detailed in the table below. US equity markets were up between 1.5 and 4%, with the NASDAQ leading the charge as technology rebounded on strong earnings. International markets were the leader, with emerging markets up over 5% and developed markets not far behind at 3%. Fixed income even held its own as interest rates receeded slightly from year-end highs
What's driving this continued rise? Remember that market prices are meant to represent the present value of anticipated future events (ie: cash flows). As a result, we believe much of the recent appreciation is the pricing-in of an anticipated favorable business environment under the new administration (namely, lower regulation). Coupled with strong earnings (on top and bottom line) and continued employment growth, markets are marching higher.
How likely is it that markets can continue on this path? We wish we had the answer. However, there are a few things we know for sure as we move forward in 2017:
1. Uncertainty in a Certainty - Yes, this has always been the case but now more than ever, there is no clear path forward. With an administration determined to change Washington and a president communicating via Twitter, markets are going to be reactive and at times volatile. Time will tell how nature and extent of policy changes on many key points (immigration, international trade, regulation, energy policy, etc). In the meantime, expect uncertainty to prevail and remember - that too can lead to opportunity and good entry points.
2. The Best Defense is a Good Offense - The best way to combat this uncertainty is thru active management. Being invested in the proper sectors, countries, and individual securities is more important than ever. There will be winners and losers during this continued global economic recovery. Staying on top of developments and actively managing accounts is essential.
3. Going up - We are closely watching inflation levels, a topic that has been noticeably missing in recent years. However, as labor force tightens and energy prices reach record level year-over-year price increases, it's likely that we'll see higher-than-expected inflation as well. This drives us towards inflation-oriented investments such as TIPs and mining and metal related companies.
4. Also Going Up - Interest rates. The Federal Reserve Bank has strongly indicated it will continue raising rates throughout 2017. We are keeping a close eye on the long-end of the yield curve and are favoring shorter duration (hurt less by rising rates) and higher yield (credit risk offsets interest rate risk) within our fixed income allocations
5. Explore the Globe - As we've always said, it's essential to build a global portfolio. Even with the "america first" messaging, there remains extensive investment opportunity beyond the US borders. We are focused on emerging countries with a rising middle class, improving demographics, and exposure to the improving commodity picture. Developed countries are a mixed picture - with commodity-focused economies like Canada, China, and Mexico likely poised to rebound but European countries still struggling (despite accomodative monetary policy) due to overhanging issues related to Brexit, upcoming elections, and ongoing immigration challenges.
It's been an exciting and unprecedented year thus far and we are anxiously awaiting what lies ahead. Invest on!