Market Strategy Radar Screen Weekly February 21, 2017

 We Can Work It Out

Unorthodox approach to the presidency shakes things up and generates dialog

That said, so far so good for the equity markets in 2017. Stateside Q4 earnings season has surprised to the upside (with S&P 500 earnings through last week up 5.6% on revenue growth of 4.82% with 411 of 500 companies thus far having reported), the dollar has moved lower against ten of the G10 currencies and lower against 19 of 22 major emerging market currencies, and economic data crossing the transom persists in showing signs of improvement that point to the sustainability of the current economic expansion (see our data commentary on page 4).

The Federal Reserve continues to steer monetary policy with a steady hand in data-dependent fashion as it pursues a process of interest rate normalization.

In the US the major indexes posted gains last week with the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite moving to new record highs as they advanced respectively on the week 1.75%, 1.51% and 1.82%. According to Barron’s the Dow and the S&P 500 each posted their 9th record high since the year started while the NASDAQ Composite crossed its 18th record high for 2017.

All of the above has led to the increased consternation of bears and skeptics who seem to call with greater frequency for the end of the bull market even as its eighth anniversary appears close on the horizon (March 9).

From our perspective on the market radar screen the rally in equities has appeared to find its source not so much in animal spirits, or in irrational exuberance, or from the results of the presidential election in November, but rather from a confluence of factors including:

• a firming of the economy and corporate earnings;
• the Federal Reserve’s reengagement in the process of rate normalization;
  as well as
• a recognition on some level by marketparticipants that while rates may be pointed higher, they are unlikely to move much higher or too quickly based on current rates of inflation, modest wage gains and a globally competitive environment that helps keep inflation in check and reduces the risk that the Fed and foreign central banks might have to raise rates dramatically in a short space of time.

Near term it appears to us that the risk remains greater for bonds than for equities as growth gains traction stateside albeit at a still-modest pace and rates normalize reflecting the Federal Reserve’s stated policy goals.

Prospects for: tax reform at the corporate and personal levels, repatriation of at least a portion of US multinational profits currently held abroad, along with a significant infrastructure stimulus package all important parts of a pro-growth, job-centered and more business-friendly agenda from the new administration’s plans, have certainly helped to boost sentiment and the market’s outlook.

It will take considerable effort and time for both sides of the political aisle to hammer out what ultimately will be the design of all this with the final outcome even further out on the calendar, and with considerable execution risk in the meantime.

Foreign Stocks Gaining Traction

Outside of the US, improvements in economic conditions (albeit broadly modest) keep pointing to a recovery process that remains a work-in-progress across regions of the world from Europe to Asia. That process has thus far served as a source of positive offsets to cross-border challenges stemming from a wide variety of issues tied to geopolitical risk, populism, trade, along with election risks and more.

Last week the MSCI EAFE index (developed markets excluding the US and Canada), and the MSCI Emerging Markets index advanced 0.78% and 0.95% respectively while MSCI Frontier markets closed flat with a positive bias on the week. From the start of the year investors have shown increased interest in the international markets, evidenced by the performance of these broad gauges of regional equities (shown in the lower graph on page 8).

Cyclical and secular economic trends along with relatively attractive valuations of equity markets outside of the US appear to us poised to garner further investment attention as the year unfolds.

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