On the Horizon: Six Focus Areas
In a Nut Shell:
- Washington, D.C. – Low expectations from CFOs and market on passage of major tax reform could be a positive market catalyst.
- North Korea – lingering concerns over Kim Jong-un keep North Korea on our Top 6 list.
- The Fed – Has embarked on the journey to normalize interest rates, though rates remain well below what most would consider normal. Also, the upcoming end of Chairwoman Janet Yellen’s term may create changes and unpredictability, depending on her successor.
- Brexit – The full impact of Brexit has not been felt and markets may have swung to the complacent side since the original vote.
- China – Little has changed and that is a good thing. We continue to keep an eye on their reform and evolution from an export to a domestically-oriented economy.
- Global economy – After picking up speed in late 2016, the momentum continues. However, expectations for continued acceleration become unrealistic at some point.
On the Horizon: Six Focus Areas
Last quarter, we introduced our On the Horizon section as a way to highlight and discuss expected and potential market moving events, news, and areas of interest or concern. This is not meant to be an all-encompassing list. There are always unanticipated developments that impact markets during any given period of time, the most obvious this past quarter being the unfortunate and devastating impacts of multiple hurricanes on the Caribbean and parts of the United States.
One thing worth emphasizing with any such list is that what moves the market is often not the news itself, but how that news differs or surprises relative to what was expected. Markets anticipate and positive news is only positive for the market if that news was even MORE positive than the market had anticipated (or vice versa). You’ll notice in the commentary below that we also offer our thoughts on what the markets may currently be anticipating.
1. Washington D.C. – This was first on our list last quarter and seems destined to stay there for quite some time. Without delving too far into the political arena, it is safe to say that progress toward many of the Trump administration’s initiatives has been slow at best. As the following graphic from CNBC shows, among CFOs participating in the Global CFO Council, the confidence level in regards to expectations on what will become law in 2017 has fallen as the year progressed. This poll was taken just prior to the quarter-end announcement on tax reform. That announcement may have shifted some predictions on tax reform and repatriation (the three sets of bars on the right). Prior to that announcement though, it was clear that expectations were low. Back to our opening comment about expectations, the CFOs and the market generally now have low expectations and passage of a major tax reform (or even a watered down one) could well be a positive market catalyst.
2. North Korea – Much like our first bullet point, fears regarding North Korea appear to be here to stay. Under Kim Jong-un’s father, North Korea had shown intermittent levels of aggressiveness, but since taking over in 2011 after his father’s death, Kim Jong-un has escalated not only the rhetoric, but the actual acts of aggression through frequent weapons testing. Like many risks that appear to verge on being ever present, the market (right or wrong) begins to become somewhat immune to them. There is still significant doubt as to North Korea’s ability to launch a meaningful, successful attack and until they do (let’s pray it doesn’t come to that) the effect on the market is likely to remain low. We include it here, however, because while probabilities may be low, the effect would clearly be high if something were to occur.
3. The Fed – Fed actions continue to be a source of great attention, debate and concern. The Fed has clearly embarked on their journey to normalize interest rates and their balance sheet. The course of action is generally agreed upon, but the speed at which it occurs is hotly debated. There is also understandably disagreement on what the “normal” level of rates is or should be. Fortunately, this process is still in the beginning stages and rates remain well below what most would consider “normal”. The wild card here is that the current Chairwoman, Janet Yellen, may be replaced this coming February when her term ends, at which point things could conceivably change quickly and unpredictably. Keep an eye on developments there, as well as what is expected to be an additional rate hike in December. Markets currently aren’t overly concerned with either and appear to expect any successor to continue with the current strategy. An appointment of a more “hawkish” chairperson would likely cause a good bit of angst in both bond and stock markets.
4. Brexit – Brexit is still out there and moving forward. While the fear around French and German elections has passed, the consequences of the Brexit vote still linger and have yet to truly have an impact. When the initial results caused a brief panic in global markets, most saw it as an overreaction. Given the market rally since that point and the likelihood that this will be a very messy unwind, markets may have swung too far to the complacent side. Unlike the first bullet point in which expectations have dropped and set a low bar, this appears to be an area that investors appear to be overlooking the potential fallout.
5. China – little has changed here and that is likely a good thing. Outside of the U.S., no country plays a bigger role in the global economy and strikes more fear in investment managers’ hearts than China. China continues to work through a difficult process in which they are attempting to slow growth from an unsustainable rate earlier in the century and evolve from an export oriented economy to a domestically oriented one, all while trying to control the rapid growth of credit via banks and a shadow banking sector. The less China is on the front page of the business news, the greater likelihood that their reform is moving along the expected path. China will hold the 19th National Congress of the Communist Party of China beginning on October 18th, but the current President is expected to be elected for another 5 year term and not much in the way of market moving events is anticipated.
6. Global Economy – the global economy started picking up speed in a nearly synchronized fashion in mid to late 2016. That momentum has carried through into 2017 and even accelerated. While this has clearly been a good thing for equity markets, the cyclical nature of economies also means the bar has been raised. Again, at some point, expectations for continued acceleration may become unrealistic.
It is noteworthy that this list is two bullet points shorter than last quarter as we removed European elections and Oil & Gas. While Germany’s Chancellor, Angela Merkel, won a fourth term in late September, there was some further erosion of power in her base. It is not enough to be overly worrisome, however, and European politics (outside of Brexit and the independence push in Catalonia) appear likely to take a turn for the less dramatic. With oil’s recovery to the $50/barrel level and the industry’s ability to continue to drive down their cost of production, the turmoil in the oil patch has subsided for most participants.
To be clear, the items above are fun to speculate on and will certainly move markets over the short term, but trying to predict them and shift portfolios based on those predictions is essentially a fool’s errand. Nobody has a clear enough crystal ball and if they did, I suspect the market reaction to the news would still confound them.
If you have any questions, please contact Brad Swinsburg at 404-874-6244.
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Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.