Positive Investor Sentiment Amid Political Uncertainty
The Raymond James Investment Strategy Committee discusses current market trends, economic conditions, and political influences for investors to consider.
Each quarter, the Raymond James Investment Strategy Committee completes a detailed survey sharing their views on the investment environment, and their responses are the basis for a discussion of key themes and investment implications covered in this quarter’s Investment Strategy Quarterly. Read commentary from the committee meeting held March 1, 2017 below, or download the entire publication for a more thorough view of the markets and the economy.
Headwinds and Tailwinds
Economic and financial market headwinds for the next six to 12 months include political uncertainty, a strong dollar and protectionism. Top tailwinds include potential tax reform, earnings growth, a low interest-rate environment and positive sentiment overall.
“Economists generally increased their 2017 to 2018 gross domestic product (GDP) forecasts following the election, but not by a lot. While the labor market has grown closer to full employment, it’s unclear how much slack remains. Business fixed investment has some room to run, but the consumer is what drives the overall economy. Labor market constraints and moderately higher inflation should be a restraint.”
“A rollback of regulations is seen as business-friendly, but despite one-party control of the White House and both chambers of Congress, added infrastructure spending and large-scale tax reform will be difficult to achieve.”
“Tailwinds include reduced regulation, improved business sentiment, and an improved global economy. Headwinds include possible missteps on foreign trade and immigration policy, which would lead to supply chain disruptions, further limit labor force growth, and create some volatility in exchange rates.”
“The Federal Reserve is in the process of normalizing monetary policy and Chair Yellen has indicated that the pace of rate increases should be faster than in the last two years. The removal of policy accommodation is a sign that officials are more comfortable with the economic outlook.”
- Scott J. Brown, Ph.D., Chief Economist, Equity Research
“The first guide to the future of European politics will be the election results in Holland. Holland votes in three weeks' time, with a populist leading the polls there, but again, I think you will see a circling of the wagons and all of the more mainstream, pro-Europe parties will keep him out of power. That would be the first stage in a positive domino effect on Europe.”
“We are starting to see inflows back to Europe, and I think this is very positive. Elections in places like Holland and France could induce further inflows if the populists don’t gain control, and I don’t think they will. With this virtuous circle of inflows pushing the euro up even further in value, cheap European stocks, and corporate earnings growth along with very loose European Central Bank policy should lead to outperformance over the rest of the year."
“The bottom line is this, I would be favoring domestic plays in Europe including the UK. Brexit is a two-year scenario with lots of technicalities and its impact on the market – that's really a backend of 2018, early 2019 situation in my view.”
“I would say in Europe, small caps have experienced a bit of a valuation anomaly because larger-cap companies have benefited more from the weak euro and the weak pound. There is greater value there with the potential for those parts of the market outperforming if Europe, overall, did a little bit better and the euro appreciates.”
“Aside from European equities, I have a sense of opportunity across other parts of the world as well, particularly in emerging markets of Asia, etc.”
- Chris Bailey, European Strategist, Raymond James Euro Equities*
“We have an overweight to non-U.S. markets, as they are doing quite well this year. The big theme last year was U.S. earnings growing at mid-single digits year-over-year, depending on where you are looking. But, in Europe and Japan, earnings grew at low double-digit rates, giving you twice the earnings growth relative to the U.S. While developed markets may not be cheap, they are relatively inexpensive compared to the U.S.”
- Nicholas Lacy, CFA, Chief Portfolio Strategist, Asset Management Services
“We’ve transitioned from an interest-driven secular bull market where interest rates come down and price-to-earnings multiples expand to an earnings-driven bull market. We had the earnings trough in the second quarter of last year, earnings flipped positive in the third quarter, and comparisons in the first and second quarter of 2017 are going to look terrific.”
– Jeff Saut, Chief Investment Strategist, Equity Research
“Equities may have limited upside in the next two to three months, but there are few signs that they are in for major trouble. Bonds will likely have their periods of outperformance as well, and seem to be out of favor at the moment, which may make for a good time to buy for diversification.”
– Andrew Adams, CMT, Senior Research Associate, Equity Research
“This is a market that wants to continue to push the envelope to the upside and we are going to continue in this phase. From a longer term, bigger picture perspective, in a market that has been running eight years and has gone from a 10 multiple to 20 multiple, we are getting a little dear, and we are robbing potential gains from down the road and whatever comes out of D.C.”
– Michael Gibbs, Managing Director of Equity Portfolio & Technical Strategy
– Doug Drabik, Senior Strategist, Fixed Income
“The bond market is saying “hey, things might get bumpy here for a couple of years…but that can also be an opportunity. Municipals, I think, are a screaming buy. They are still cheap.”
- Benjamin Streed, CFA, Strategist, Fixed Income
"Municipal bonds, in particular, reacted negatively to the Trump election. Fears of changing tax rates, fiscal spending, and reflation all conspired to send muni yield ratios over 100% of Treasuries. This has historically been a strong buy signal for tax-free bonds. We believe this time is no different.”
– James Camp, CFA, Managing Director of Fixed Income, Eagle Asset Management*
“Renting still has momentum. But when interest rates rise, mortgage rates will go up as well. It matters – 25 basis points matters in housing. So, housing is not going to lead us to higher growth as it has done in some cycles.”
“We need to get more income to the consumer, and we need more houses. However, if you own a house, depending on the neighborhood, more than likely the value is going to go up.”
– Paul Puryear, Director of Real Estate Research, Equity Research
Energy and Oil
“The recent drop in oil prices reflects Saudi Arabia’s publicly expressed displeasure with the rest of OPEC (and Russia) for their poor level of compliance with the agreed-upon production cut. As a result, the market has become more skeptical about an extension of the agreement beyond mid-year.”
“Oil prices are also weighed down by a strong dollar and still high levels of refined product inventories.”
“Reasons for our optimism in further price recovery toward cyclical highs of $70/Bbl in 2017 include the likelihood of further supply declines this year in several non-OPEC geographies (China, Mexico, Colombia), ongoing supply outages (Libya, Nigeria, Venezuela), and a broadly upbeat picture for global demand.”
– Pavel Molchanov, Senior Vice President, Energy Analyst, Equity Research
“Across the board, this past year was challenging for the more liquid alternative investment strategies, both in terms of performance and asset gathering.”
“The active versus passive management debate is certainly a key issue in the industry. We continue to see signs that point to active management coming back into play.”
– Jennifer Suden, Director of Alternative Investments Research, PCG Investment Products
*An affiliate of Raymond James & Associates and Raymond James Financial Services, Inc.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance that any forecasts will occur. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The market value of bonds may be affected by several risks including interest rate risk, default or credit risk, and liquidity risk. Asset allocation and diversification do not guarantee a profit nor protect against loss. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.