Global Market Commentary

January 05, 2017

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Our 2017 Outlook Is Optimistic:  A Short Summary

The Rise of Nationalism Has Changed the World
Last year, rising nationalism sparked many global events, and is now an established global trend.
We saw it especially in Europe.  The European Union’s governing powers in Brussels have long promoted internationalism — and have created resentment among workers and entrepreneurs in economic sectors that don’t benefit from it.
Indeed, the EU has put policies in place that undermine local and national interests in order to focus on achieving the priorities of the whole bloc (which really means, the interests of the largely unelected Brussels bureaucracy).  These policies have spurred the rise of nationalist parties around Europe.  The EU’s focus on achieving its goals — which are often far removed from the daily concerns of ordinary workers and businesspeople — has angered many of Europe’s voters, especially those in domestic industries.
Industries such as fishing, farming, local retailing, and local delivery of goods and services have been hurt by new and often destructive rules, while supra-national industries such as banking, finance, and international trade have been benefitted.
Internationalism’s economic castaways have been subjected to new EU regulations that discourage or prevent them from working and doing business in their traditional and accustomed manner.  These voters are, to put it politely, greatly irritated, and have responded by moving closer to nationalist political parties, both established and new.
This wave of nationalist sentiment has swept into Italy, France, Greece, Spain, Austria, and elsewhere.  Britain has voted to leave the EU, and we predict that several other countries will leave over the next few years.
Although there is the prospect of further trouble from Europe’s populist and nationalist wave, companies in many European industries have suffered from the poor sentiment that this turmoil generated in 2016.  If the U.S. dollar remains strong and the euro remains weak, there is the possibility of improved sentiment, especially for European exporters to the U.S. market.  Further, there is no uncertainty for European stocks about who might be the next target of President-elect Trump’s displeasure, which will be psychologically helpful for their prices.  Be careful about the euro, however.  There are several exchange-traded vehicles which investors can use to hedge their currency exposure as they seek battered bargains among Europe’s exporters.
The U.S. Election Has Led To Greater Consumer and Business Optimism
The University of Michigan’s consumer sentiment index for December, 2016 came in at 98.2 — the highest since January 2004, and above the peak registered in early 2015.  The National Federation of Independent Businesses’ small business optimism index increased in November by 3.5, to 98.4.  The Conference Board’s consumer confidence index rose to 113.7 in December, reaching the highest level since 2001 (immediately before the 9/11 attacks).


Data Source:  Federal Reserve Bank of St Louis
President-elect Trump ran on a nationalist platform which was supported by those voters who feel disenfranchised by the effect of internationalism on their employment, their standard of living, and their family stability.  He will enter office with some advantages and some disadvantages.  One advantage is his outsider status, and his willingness to take on what he sees as the corruption of big government by both major political parties.  He has the support of small and mid-sized business, blue-collar White voters and a surprising number of Hispanic voters (a demographic where he did better than Mitt Romney had in 2012), as well as middle and upper-middle income taxpayers.
For several years, many U.S. business owners have felt that their growth prospects were under siege, as they struggled to survive the wave of new regulatory costs and tax increases — including all of the taxes that arrived with the Affordable Care Act.  
2017 U.S. Stock Market: More Investor Optimism and More Investment Opportunities
The outgoing administration was enthusiastic about expanding regulations; in contrast, the incoming administration looks like it will be much more parsimonious.  Certain industries will benefit from that regulatory skepticism and enjoy reduced costs and better profit margins as a consequence.  All tax-paying businesses will benefit if corporate taxes are cut from the statutory Federal rate of 35%, down toward 15–20%.
Both lighter regulation and lower taxes will boost corporate profits, which are the “mother’s milk of higher stocks prices,” as we never tire of pointing out.  Whether or not the new administration achieves most of its political goals is simply not as important to the stock market as the issue of tax cuts and higher corporate profits.
On the negative side, U.S. stock prices are not low.  They are on the higher side of average, so a stock market correction beginning in 2017 is probable.  
We anticipate that such a correction will be mild, and present an opportunity to buy the stocks of growing companies at attractive levels.  Our previous letters have outlined which U.S. industries will be benefitted by a change in trend in several areas of the economy.
In 2017, as opposed to past years, we have greater-than-usual knowledge about which industries will be under attack and which will be benefitted by less regulation and lower taxes.  Those who sell to the U.S. government will be expected to provide price cuts and good value to the U.S. taxpayer (their ultimate customer).  So pharmaceutical and defense companies will have to sharpen their pencils and cut prices in order to keep the business that they do with the government.  Regulatory burdens and corporate income taxes will decrease, so banks and financial services such as brokers, credit cards, and lenders will benefit.
Healthcare beyond pharmaceuticals and biotech; technology; and energy are other areas where opportunities will arise.  The jury is still out on precious metals, but they may start to do better in the coming weeks or months.
In summary, we are bullish on investment opportunities in 2017, and we are enthusiastic to get started on the new year.
Investment implications:  2016 saw nationalist political insurgencies in many countries around the world.  Such insurgencies were particularly apparent in Europe.  Decisions of the centralized European Union bureaucracy in Brussels have chafed workers and businesspeople who have missed out on the benefits of the EU’s internationalist agenda — and have seen their national and local interests sidelined.  More trouble will eventually come to Europe, but in the meantime, beaten-down stocks and the prospect of a weak euro could boost sentiment about the fortunes of Europe’s exporters.  Investors looking for bargains should be sure to hedge the currency.  In the U.S., a sea change in consumer optimism is underway, with some indicators reaching highs not seen in more than a decade.  The prospect of a lighter regulatory touch from the incoming administration, as well as the prospect of significant cuts in the headline corporate tax rate, will be good medicine for corporate profits even if many of the new administration’s bigger policy goals prove troublesome to implement.  We’re optimistic and ready for the new year.