Market Outlook

  1. Market Outlook

    The U.S. elections, OPEC negotiations and Federal Reserve policy all impacted market returns last quarter, with broad equity benchmark returns ranging from +1.2% to +3.8%. Prior to the election on November 8, investors had largely priced expectations for more of the same regarding governmental policy and its effects on the financial markets. When the polls closed, the results ushered in a changing of the guard. Unlike the past eight years, investors now believe the coming year will bring some combination of fiscal policy, higher inflation, faster economic growth, reduced regulation and tax cuts. It helps tremendously that economic growth has already resumed with 3rd quarter GDP increasing by 3.5% with similar expectations for the 4th quarter. This rate of economic expansion represents a stark departure from the prior three quarters of 1% growth, and 3rd quarter also was the first in the last seven to show positive earnings growth. Against this backdrop investors will shift their focus to companies with stronger earnings acceleration, proprietary advantages and solid balance sheets, and away from slower growing, higher yielding companies. We expect 2017 equity returns to be in the 8-10% range, driven by financial, industrial, energy and technology sectors. Earnings will grow in the middle single digits and accelerate into 2018 as infrastructure spending, tax reform and economic growth pick up. Infrastructure stocks should do well as the market anticipates spending in the late 3rd and 4th quarters. Regulation and tax reductions will help domestically oriented companies, led by the banking industry. Technology revenue and earnings will continue…

  2. Is 2% a hard inflation target?

    In 2012, following their January 25 meeting, the Federal Reserve issued a press release that included their first stated commitment to an inflation target. “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures (PCE), is most consistent over the longer run with the Federal Reserve’s statutory mandate”. Pioneered in New Zealand in 1990, the Federal Reserve became the 24th central bank to adopt an inflation target, following in the footsteps of such monetary policy luminaries as Brazil, Armenia and Guatemala. Prior to this adoption, the Federal Open Market Committee (FOMC) regularly announced a desired target range for inflation, usually between 1.0% and 2.0%. Moving from a range to a specific target went hand in hand with the broader push for increased transparency on the part of the FOMC. The belief was that increased transparency would enhance the effectiveness of monetary policy and ease the way for its acceptance and implementation and eventual success. We have always found it curious that investors and consumers need to be told what level of inflation is good or bad in the first place. Nevertheless, in the five years that have passed since adopting an inflation target in the United States, we have yet to reach that bogey. In a speech at an economic conference on October 14, 2016, FOMC Chair Janet Yellen asked a series of questions regarding research around the 2008 crisis and its aftermath. In one instance she invoked the term…