January 2017 Review and Market Outlook

Market commentary by Kim Mailey

February 3, 2017

As predicted – January has had lots of twists and turns!

The U.S. markets climbed almost 2% to January 27, and then seemed to pause with a sobering look at the implications of the new U.S. administration’s policy and pace of the issuance of Executive Orders.

Contacts
January ’17 1 year 3 year 5 year 10 year
S&P/TSX Composite + 0.64% + 20.00% + 3.96%/yr. + 4.32%/yr. + 1.67%/yr.
S&P 500 (C$) – 1.33% + 9.13% + 14.48%/yr. + 17.65%/yr. + 5.77%/yr.
MSCI EAFE (C$) – 0.26% + 1.14% + 3.43%/yr. + 8.63%/yr. – 0.86%/yr.

* Source: Equity Index and Currency Data: Bloomberg. Data as of December 30, 2016

The Mailey Rogers Group along with interested clients and prospective clients attended last night’s 2017 Economic Outlook presented by Nick Chamie, Scotia Wealth Management’s Chief Investment Officer, International Wealth Management, and Director, Fixed Income & Strategy. Some of the key points Nick touched on were:

With the unpredictability of the new U.S. administration and several elections that will take place in Europe this year, Nick expects increased volatility.

Nick believes that the chance of a recession is very remote. He expects a U.S GDP of 2½% to 3% and global GDP to be a respectable 3% to 3½% in 2017/18. He believes that global equities will remain the best performing asset class for all of this year and most of next year.

Nick expects that late in 2018 or early in 2019 the market is likely to experience a mild correction. Having said that, he is also convinced that we are still near the beginning of a long-term equity bull market.

Nick believes that the 30-year bull market in bonds is over. The U.S announced policy to reduce corporate taxes, increase infrastructure spending and the fact that the U.S. is technically at full employment spells increased interest rates.

(I am able to send an electronic copy of his full presentation. Just let me know.)

Strategy: The focus for markets in the near-term will clearly be fixated on the new U.S. administration’s policy measures which have already included executive orders to exit TPP trade talks, open NAFTA negotiations, defer portions of Obamacare, and impose a federal hiring freeze. Key for markets will be an agreement on a tax reform package that could include “border-adjustment”/import taxes and income tax cuts, as well as plans for a fiscal stimulus economic boost. Meanwhile, the Fed has begun warning of the need to trade-off possible fiscal stimulus with monetary policy tightening within the context of an economy already running near full-employment to contain building inflationary pressure. When combined with the solid upturn in global economic activity data, rebound in inflation readings, firmer Fed rate hike prospects and stronger commodity prices, the developing policy outlook is helping to reinforce the conditions for a reflation/cyclical investment strategy to outperform. Stay overweight equities particularly in cyclical sectors and underweight in fixed income as yields climb.

Equities: With 34% of companies having reported fourth quarter earnings in the U.S., 65% have exceeded their earnings per share estimates and 52% have exceeded their revenue expectations. Positive earnings momentum is expected to continue for the rest of 2017. The Quantitative Easing fueled environment of near zero interest rates for many years, suppressed active manager’s abilities. Many stocks were “going up with the tide”, not because of their value and strategic management. Going forward, a fiscally-charged world will make active stock selection the chief driver of returns, in my view.

Outside of the U.S., economic readings in the rest of the world have also positively surprised most forecasters. The Gross Domestic Product, inflation rate and Purchasing Managers’ Index from Europe, Japan and China were all in line or better than expected. As a result, economic forecasts have also been revised upward for the first time in many years. The pace of global economic output growth is expected to accelerate this year and next. Economic momentum spreading beyond the U.S. to the rest of the world should help the U.S. Fed to act more freely in response to a possible fiscal stimulus boost to inflationary pressures.

The improving economic fundamentals of the United States, along with further monetary tightening in the form of additional interest rate increases, should take the US dollar higher this year. At a recent OPEC meeting in Vienna, all member countries appeared to be complying with the supply cut accord. However, the markets are now focusing on the number of U.S. rigs coming back into production, fueling concern that the rising U.S oil production will be largely offset from OPEC’s supply cuts. The expectation is that oil, currently in the $53 U.S. range will end the year near $60 U.S.

Mailey Rogers Group is here to help and we welcome any questions you may have.

Sincerely,

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Mr. Kim Mailey, CFP
Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group
1555 Marine Drive,
West Vancouver
Tel: 604.913.7013
www.maileyrogers.com
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