Clarksville, TN – 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 an overview of the key themes 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 twelve months include a strong dollar, rising interest rates and policy uncertainty. Top tailwinds include a healthy job market, potential for fiscal stimulus and accommodative monetary policy.
- “The pre-election outlook held that slowing population growth – resulting in slower labor input and economic growth – was the ‘new normal.’ Post-election sentiment suggests that we are going to get some fiscal stimulus, but that will likely be ineffective in boosting growth on a long-term basis due to demographic constraints.”
- “I’m not optimistic that we’ll see a big increase in GDP growth. Economists have been raising their growth forecasts for next year, but only slightly, so you’re looking at a little over 2% in 2017. We could see a quarter or two of strong growth but it’s not sustainable, unless we increase immigration or get a sharp rise in productivity growth.”
- “While there are a number of uncertainties in the economic outlook, the largest risk is in global trade. A trade war would boost inflation through higher import costs and disrupt supply chains in U.S. manufacturing. Cooler heads should prevail, but a trade war would undermine economic growth at a time when global trade is already slowing.”
- “The job market should continue to tighten in the near term, putting some upward pressure on wages, although consumer price inflation is likely to be moderate. The Federal Reserve should continue to gradually normalize short-term interest rates. Increased government borrowing should lift long-term interest rates.”
– Scott Brown, Ph.D., Chief Economist, Equity Research
- “The pollsters got something right by correctly predicting that the ‘no vote’ would prevail in the Italian constitutional referendum. In my opinion, this vote is being blown up as something which massively undermines European stability.”
- “There is no doubt that a backlash against the European political elite is happening and clearly there are issues to work through in Italy. Banks remain troubled, the political system is uncertain and the people are unhappy, but my feeling is that the Italians do not want to leave the European Union.”
- “The direction of Brexit is, to me, quite clear. The timetable is slower, practical realities are showing a ‘soft’ Brexit as the likely endpoint, rather than a more divisive, aggressive kind of breaking up of relations between the UK and the European Union.”
- “Europe is not perfect – there are going to be bumps in the road. However, versus three or six months ago, there’s a little bit of hope. The catalysts would be more earnings growth and potential political stability with the upcoming elections in Germany and France. Combine this with last year’s big outflows from European equity markets, and opportunities may surface going forward.”
– Chris Bailey, European Strategist, Raymond James Euro Equities*
- “Concerns over Asia will be centered on China in 2017: the sustainability of growth, the banking system, the property market, and foreign exchange. However, the positive aspects which perhaps people are underestimating are the continuing reforms in China. And they are very impressive.”
– Chris Bailey, European Strategist, Raymond James Euro Equities*
- “Just as labor force issues are coming to the forefront in the U.S. and demographic shifts are hitting home in Europe, China is now in a position where its labor force is starting to decline as well. It’s a common refrain that China will get old before it gets rich. There’s significant risk to all assets coming out of China, and I think it’s very important to keep monitoring that.”
– Paul Berg, CFA, Portfolio Manager, Cougar Global Investments*
- “I think stocks are going substantially higher. I don’t think the markets are overvalued or that the strong dollar will hurt corporate earnings. The markets are transitioning from an interest rate-driven secular bull market to an earnings-driven secular bull market.”
- “You’ve got six stages of emotion that investors go through and, right now, I think we’re nowhere near exuberance or ecstasy or any of the other phases you come to before a secular bull market ends.”
- “People are woefully underinvested in the equity markets, and I do think the economy is going to pick up. The market is telling us something is happening, and it’s good.”
– Jeff Saut, Chief Investment Strategist, Equity Research
- “So far, the rally we’ve seen has been the kind of broadbased rally that you want at this stage. It’s been led by higher betas, and financials and energy are finally coming around. It’s not the narrow rally we saw last year.”
– Andrew Adams, CMT, Senior Research Associate, Equity Research
- “Near term the market has a nice tailwind to it – it’s completely convinced that fiscal stimulus is coming, which will generate GDP growth and make earnings targets much easier to achieve.”
- “I’m pretty comfortable about earnings going forward if we do get tax cuts because the magnitude of the moves would be big. However, it’s probably going to be tax reform rather than tax cuts – which takes a lot longer to do. The reality of these things actually happening may slow the rate of ascent.”
– Michael Gibbs, Managing Director of Equity Portfolio & Technical Strategy
- “Despite recent volatility, the fixed income markets really are not out of whack. We’ve remained in an accommodative policy, which has not resulted in inflation, and bonds in general have stayed fairly strong.”
- “Asset allocation is important and, from a strategic standpoint, we are staying the course. Rising interest rates and the widening of municipal market spreads further emphasize decent opportunities for fixed income.”
– Doug Drabik, Senior Strategist, Fixed Income
- “Municipal bonds are unbelievably attractive right now. They’re trading above Treasuries in terms of yield across the curve, so for investors that pay high marginal tax rates, munis look fantastic.”
– Benjamin Streed, CFA, Strategist, Fixed Income
- “Inflation has bottomed. If you think the baton should go from central bankers to the fiscal policy makers, you have a reason to believe. Risk markets will continue to rally into the first quarter.”
- “Near-term risk markets have more room to run with economic and fiscal policy optimism. Through Q1 of 2017, the market is going to do well. The curve is steep. There’s a term premium. Let’s not forget that we opened 2016 with a big downdraft. This is a retracement from Brexit low yields and not particularly concerning.”
– James Camp, CFA, Managing Director of Fixed Income, Eagle Asset Management*
- “Housing is fine. It’s not robust. Demographic trends are acting as a drag and housing isn’t fueling economic growth like it has in past cycles, which in some ways could be a good thing. The two wild cards for housing in 2017 are inflation and interest rates.”
- “Affordability issues have been exacerbated because incomes haven’t kept up with inflation. Construction costs – particularly in labor and permits – are likely to get worse, not better.”
- “On infrastructure spending, I’m more concerned about what it does to the inflation rate and the labor pool – both of which are strained right now.”
– Paul Puryear, Director of Real Estate Research
Energy and Oil
- “With OPEC’s announcement to cut supply, you would think oil prices should celebrate, and they did to a degree. Still, prices are considerably lower than where we thought they would be at this point in time.”
- “Saudi Arabia cutting production is a bullish signal for the market. Bullish in the sense of fewer physical barrels on the market but also in a psychological sense, because they finally called a truce after fighting a price war for the past two years. That changes how investors, and commodity speculators, think about downside and upside.”
- “The fact that oil is not yet in the $60s is going to affect capital spending decisions by oil and gas producers across the spectrum around the world. Initial capital budgets will probably be on the lower end of expectations, but still mostly showing recovery from the prior year.”
- “Headwinds for oil in 2017 include recovering production in Nigeria and Libya, unexpected supply growth in Russia, and a strong U.S. dollar.”
– Pavel Molchanov, Senior Vice President, Energy Analyst, Equity Research
- “Two trends we are seeing in the hedge fund industry are fee compression, driven by a decline in the average management fee charged, and increased liquidations relative to launches. In fact, though the average launch size has grown, 2016 is turning out to be the slowest year for new hedge fund launches since 2009.”
- “For an ultra-high net worth investor, we believe a minimum strategic long-term allocation of 20% to alternatives is warranted. Though it depends on the client’s risk/return objectives, generally this allocation should be accomplished through a mix of hedge fund and private equity strategies, providing the ability to capitalize on the illiquidity premiums.”
– Jennifer Suden, Director of Alternative Investments Research
*An affiliate of Raymond James & Associates and Raymond James Financial Services.
All expressions of opinion reflect the judgment of Raymond James and are subject to change. Past performance may not be indicative of future results. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Investing involves risks, 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.
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. Alternative investment strategies involve greater risks and are only appropriate for the most sophisticated, knowledgeable and wealthiest of investors. You should only invest in managed futures if you do not require a liquid investment and can bear the risk of substantial losses.
While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, or state or local taxes. Profits and losses on federally tax-exempt bonds may be subject to capital gains tax treatment. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Asset allocation does not ensure a profit nor protect against loss. Beta compares volatility of a security with an index, such as the S&P 500.
Real Estate Investment Trusts (REITs) involve risks such as refinancing, economic conditions in the real estate industry, changes in property values and dependency on real estate management. Investing in smaller, newer companies generally involves greater risks than investing in larger, more established companies, and may not be appropriate for every investor.