Three Market Themes to Follow for 2017

Talking Points:

– As a year closes on an extremely-positive note with many equity indices during or near-highs, holding a demeanour during a bigger design shows that holds are during historically-expensive levels as we pierce into a year in that a Fed is approaching to continue normalizing policy. It can be dangerous to follow here.

– The Fed has pronounced that they’re awaiting 3 hikes for subsequent year. Last year, they pronounced they were looking for 4 in 2016 and we usually saw one. Considerable sensitivity was in USD around most of a year on a import of how quick or delayed a Fed was looking to travel rates; and this will expected sojourn a vigour indicate for markets in 2017.

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We sealed final year by inventory a ‘top 3 themes for 2016’ as continued debility in China, deeper drops in Commodity Prices and, of course, the rate travel quandary during a Fed. Each of these themes played some purpose in a growth of tellurian markets around a year, though it was unequivocally a surprises on a domestic spectrum that a) took so many by warn and b) tangible this year’s cost action.

Stocks – How Long Can We Sustain a Rally?

We pierce into 2017 on a significantly some-more certain note as we now have a promises of continued financial accommodation from many vital economies along with a hopes of mercantile impulse out of a United States. Stock prices have run-up to even-higher all-time-highs and ubiquitous marketplace view is removing closer to a state of euphoria than what has been seen for a long, prolonged time.

But now that most of a marketplace is looking in one instruction (up) and with prices during uninformed highs, it’s time for traders and investors to demeanour during a large design to weigh either stream valuations are fitting by a elemental backdrop; and frankly, they aren’t.

Hope appears to have let investors get forward of themselves after a Presidential election, as equity valuations on a SP 500 are impending dangerous territory; levels that we’ve usually been during a few opposite times over a past 100 years with flattering most any of those situations solution really badly. (We discussed this in a article, Are U.S. Stocks Expensive? Yes.)

On a draft below, we’re looking during Shiller PE ratios on a SP 500 given a year 1900. We’ve demarcated a spin of ‘25’ as there are usually a few chronological instances in that holds were this ‘expensive’ formed on 10-year average, inflation-adjusted earnings. None of these have incited out well. So, sure, maybe this time is different… like we saw in 1999, investors were so overjoyed around a ‘tech boom’ that valuations gathering all a approach adult towards a spin of ’45,’ distant over where valuations have ever been during before.

So holds being costly isn’t a approach short-thesis. But it certain is something that a merchant or financier should consider about before ‘loading up’ for a subsequent partial of a move. And if/when batch prices do start to move-lower for whatever reason triggers a selling, this is something to keep in mind as a ‘dips’ in equity prices competence not be as forgiving as they were went holds weren’t so expensive.

Three Market Themes to Follow for 2017

Chart prepared by James Stanley

FOMC – Are We Really Going to Get Three Hikes?

Probably not; during slightest if story is any guide, we competence get dual given a further of wish around a grounds of mercantile stimulus.

The problem with 3 rate hikes in 2017 is a banking issue… If a Federal Reserve hikes rates 75 basement points around a year while a ECB is still in a center of a QE-program, a Bank of England is actively shopping corporate holds and a Bank of Japan is fully-engaged in produce bend control, and Dollar-strength can eventually spin a problem. This is something we listened Chair Yellen discuss in Jan after a Fed acted a initial rate travel in over 9 years; that if a U.S. is one of a sole vital economies actively looking to lift rates, a U.S. Dollar was substantially going to accept substantial collateral flows as investors gathering into a Greenback to get those new, aloft rates.

But a smaller scale of what led to Japan’s mislaid decades could, eventually, start to uncover in a U.S. economy as exporters face vigour from a some-more costly currency. A rising dollar, frankly, puts American producers during a disadvantage, even on their possess home territory when currencies like a Yen or a Euro are held-down by dovish financial policy. This is a under-belly of globalization: We’re all in this together, and we can’t equivocate it. Fifty years ago, it competence have been probable for an economy to redeem in isolation; though currently – that’s significantly some-more formidable as economies share pain and, to a obtuse degree, gains.

As we pierce into 2017, a U.S. Dollar is during 14-year highs after a generous Trump-fueled convene pennyless above before resistance. This is still a ‘young’ pierce so we expected haven’t seen this filter into tangible consumer-level prices yet. But as a Greenback forges ahead, a luck of this apropos an emanate continues to increase.

The large doubt for 2017 is either or not a Dollar strengthens adequate to where it becomes an emanate for additional Fed rate hikes; and if it does – how will they demeanour to contend with a issue?

Three Market Themes to Follow for 2017

Chart prepared by James Stanley

Populism Rising – European Elections

Probably one of a some-more startling turn-of-events from this year was a arise of populism. This is a bit some-more formidable to prognosticate, and that was proven to us by countless pollsters around a year that continued to beat while striking-out with forecasts around Brexit and afterwards a U.S. Presidential election. Politics are dangerous for markets since even if we did know how a given opinion was going to spin out, there is substantially small possibility that we can envision a approach that cost movement will respond. Last month’s choosing in a United States serves as proof, as most of a free-world was certain that a Donald Trump presidency would spell doom-and-gloom and, here we are during uninformed all-time-highs.

Next year brings pivotal choosing cycles in a European stalwarts of France and Germany. Both countries are pivotal to continued European-integration, and upsets in these elections could wreak poignant massacre on a tellurian economy; as there competence be some-more during interest than only any inhabitant election.

— Written by James Stanley, Analyst for DailyFX.com

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