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Investing in a Complicated World
A Conversation With Whitnell’s Chief Investment Officer On Some Of The Major Issues Facing Investors In 2017
January 23, 2017
Last January you described your outlook as being cautiously optimistic. Many are saying that the election of Donald Trump as President has ushered in a new set of uncertainties that affects the global economy and markets. With the policies he has espoused and all the uncertainties his election brings, are you still cautiously optimistic?
First of all it is important to remember that we do not attempt to make forecasts. No one knows what the global economy will be like over the next twelve months and beyond, much less how markets might react to any outcome. These things are unknowable. Even so, considering how it possibly could change the investment environment, it will be important to monitor how the rhetoric of the President’s campaign is translated into the reality of the presidency. But yes, we are cautiously optimistic.
What keeps you awake at night?
I usually sleep peacefully even though the inherent uncertainties in the global economy and short-term swings in the markets do cause some to worry. There are always bad things which have a chance of happening that could shake investor confidence and might result in a sell-off in the market. But there are also many good things which might occur that usually get less attention. So instead of focusing on those things we can’t control or predict, we concentrate our efforts on helping our clients construct a portfolio designed to meet their long-term objectives while avoiding unnecessary risks.
Some say that the national election outcome reflects, in many respects, a divided electorate in the U.S. and many global countries. What areas of concern are you watching that could have an impact on the investment environment?
There are many possibilities to consider. The Brexit vote last year and the collapse in the Euro bring uncertainty to Europe’s economic prospects, as do upcoming elections in 2017. In the U.S. the risk of the Fed making a policy mistake is now being further complicated with the talk of proposed increases in government spending and tax cuts which may lead to larger budget deficits. Ongoing terrorist attacks and social unrest may negatively impact investor confidence.
What is a major concern that affects global economic growth?
No nation is an island unto itself. Global trade has been an important driver of economic growth over the years and has also lowered costs for U.S. consumers. The impact of lower growth rates and weakening currency in China is being closely monitored. It is troubling that the President has espoused imposing tariffs, which could lead to trade wars.
Now that the Fed is ending its quantitative easing program is the prospect for higher rates a threat to investment returns and the growth of the economy?
The Fed finally began to end its extraordinary policy of monetary ease by raising the Fed Funds rate in December 2015 and 2016. The current Fed is the most dovish in history and has said that future rate increases will be gradual and be made at a time when trends for the economy and employment are showing sustainable improvement. As such, it seems most likely that the near-term rise in rates will be muted. One concern some express is that going too slow may lead to a further rise in inflation and/or strengthen the value of the dollar, negatively impacting U.S. exports and overseas profits.
Whitnell’s Perspective on Markets and Investing
Fixed Income: Prospective returns for most fixed income investments are not attractive, with interest rates and credit spreads at very low levels, at a time when inflation and interest rates have begun to rise. High quality bonds may help buffer equity volatility and provide some desired liquidity, but they don’t offer high enough yields to fully offset the possible declines in bond prices as rates rise.
Equities: Following the election of Donald Trump in November the S&P 500 rose by 6% through year-end. The market has held those gains to date, possibly based on expectations that his policies, if enacted, would be favorable for the economy and markets, strengthening the profit cycle, which had already turned positive. Our view is that while some segments of the market may be fully valued, there continue to be selected opportunities across most equity markets, domestically and overseas, in both developed and emerging markets, for investors to earn attractive returns. Also, low quality stocks were helped by the monetary policies that kept rates low. As these actions are reversed, high quality may do better.
Thanks, Dave, any final thoughts?
As always, it’s critical that investors understand that higher volatility is normal and can provide opportunities for investment. Each should have a strategic asset allocation, designed to achieve their long-term investment objectives that they can stay with when markets face times of stress. Often the greatest rewards come following times of uncertainty and discomfort. We wish all of our clients and other friends the best for 2017.
Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.