Quarter Recap

by Derek Felske, Chief Investment Officer
Annex Wealth Management

2016 will be remembered as one of the most news driven years for investors since 2008. After a rocky start to the year, equity markets quickly recovered as the S&P 500 crossed above 2200 for the first time and the Dow Jones Industrial Average flirted with the 20,000 level. Since the presidential election, equity markets and the U.S. dollar have posted impressive gains due to the belief that Trump’s pro-growth and pro-US policy ideas will ultimately result in stronger economic growth and higher corporate profits. On the flip side, most fixed income markets have declined as interest rates have risen sharply from historically low levels.

2016 Election

As we enter 2017, the sharp market moves since the 2016 election have not been fully reflected in underlying fundamentals. In addition, with the U.S. dollar at a 14 year high, companies with significant international exposure will face an earnings headwind. Although these factors impact the thinking of the Investment Committee, there are also reasons to be optimistic.  Tax reform and infrastructure spending, in particular, could boost earnings and encourage investment in new initiatives that enhance corporate profits. Meanwhile, the pressure on interest sensitive vehicles often seen as “safe assets” may result in a significant rotation toward equities and more credit sensitive fixed income securities.

Trump Administration

In the first 100 days of the Trump Administration investors will watch closely to determine how effective the new President and the Republican congress are at governing the nation.  Given the current level of uncertainty, we believe it makes sense to maintain a balanced portfolio with a pro-growth investment stance. The key for further equity gains remains corporate earnings. With business confidence improving, consumer confidence strong and labor trends positive, we expect the US economy to accelerate modestly into 2017 and corporate earnings to follow suit as the negative earnings headwinds from lower oil prices diminish. Overseas, in spite of the negative headlines, we remain constructive on international equities due to compelling valuations and more accommodative monetary policy.