Inflation, growth in the cards: 2017 outlook

The year 2017 appears to be a period of changes. In addition to Donald Trump becoming President after the biggest upset in U.S. political history, new currents are flowing in the stock market and global economy. Today’s outlook will review these trends. 

Inflation and interest rates:

The last three months of 2016 saw interest rates and commodity prices rise sharply. This lifted financials like banks and brokers and materials such as steelmakers and chemicals. There may be potential for further rotation into these sectors because both lagged the broader S&P 500 since 2009. Investors will watch economic data and central bank policies for confirmation.

Better growth in developed economies:

Trump’s election has already boosted sentiment among U.S. consumers and small businesses. The Federal Reserve has also grown more confident, especially as business investment and government spending increase. Smaller industrial stocks have been major beneficiaries so far.

Conditions are getting better across the Atlantic as well, with Euro Zone sentiment at multiyear highs and deflation easing. European banks have rebounded from long-lows as a result, and most now trade above their 200-day moving averages. Given the strength in their U.S. counterparts, investors may continue hunting for value in the group.

Russia good, China bad?

The Market Vectors Russia Fund (RSX) is the best-performing major country ETF in the last six months. Traders may look for further strength as economists look for stronger oil prices and potential interest-rate cuts to lift growth this year.

China, on the other hand, ended 2016 with a minor currency crisis. Beijing successfully defended the yuan, lost hundreds of billions in foreign-exchange reserves. There is also evidence that the country’s once mighty export machine is slowing — especially as Trump looks to protect U.S. manufacturers. 

A turn in oil?

The Organization of Petroleum Exporting Countries agreed on Nov. 30 to cut output for the first time since 2008. Crude was on the rise even before the news, and further gains may be limited as Iran and Iraq boost shipments. But the real impact seems to be a lift for domestic producers (frackers and shale), who can now survive with oil in the $40s. That’s another positive for U.S. economic growth. 

Retail under siege:

The shift to E-commerce is finally becoming a major problem for traditional retailers, which have few choices but to close locations. There are also supply-chain hazards as Trump’s proposed tax reforms threaten to raise the cost of imported merchandise. Real-estate investment trusts that operate shopping centers, already at risk from higher interest rates, are starting to feel the pain of vacancies as well.

Trouble on K Street:

Certain corporations and their lobbyists have enjoyed a cozy relationship with lawmakers for years, but Trump wants to shake things up. He’s already managed to lower prices for high-profile aerospace contracts and has bashed drug companies over high prices. Given his willingness to name names on Twitter, look for more disruptions to business as usual in 2017.

Electronic payments:

The shift to E-commerce, combined with brisk economic growth in the U.S. and Europe, draws attention to providers of electronic/mobile payments and traditional credit-card firms. India is likely to become a major player in this movement as policymakers force consumers to use less cash.

 Earnings growth is back:

Corporate profits rose 3.1 percent in the third quarter, and could be expected to climb at an even quicker pace in Q4. Number-cruncher Factset sees the potential for the quickest gains in more than three years. They’re also projecting better performance on the top line, which means companies aren’t simply cutting costs to hit their targets.

 Autos revving?:

Carmakers and related companies (parts suppliers, dealerships) have mostly outperformed in the last 3-6 months amid a steady flow of strong monthly sales and strong guidance. This fights a bearish tide in the broader retailer/consumer space (as we saw in December), and has lifted auto-making jobs to their best levels in more than eight years.

 Less takeover activity:

While Trump’s victory has lifted confidence elsewhere in the economy, his populist tone has stymied dealmaking. Bloomberg data shows global merger volume down 16% in the fourth quarter, and remaining below 2016’s pace so far this year.

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