Investment View Q4 2016
It is very unusual that both stocks and bonds are expensive at the same time. US median stocks trade at their highest valuations ever, according to Goldman Sachs. Meanwhile, we have HSBC calling for an October 1987 type of crash, a sentiment echoed by numerous other investment banks.
However, there just isn’t enough evidence that a major top is developing. Important technical indicators do not predict any major breakdown of the markets anytime soon. The US S&P 500 has been basically locked in a range between its mid-August high and its mid-September low.
On the fundamental side, world GDP is expected to grow by +2.7% in 2017 from +2.2% this year. On the earnings front, it appears that after four years of downgrades, earnings are getting better as reflected in the analysts’ earnings revisions. Conditions should improve in 2017, with consensus expectations pointing to a +10% earnings increase in the US and Europe.
It will be interesting to see in the coming days if important technical support zones (2030 on the S&P 500) can hold. Patience has been the correct strategy. Trading the portfolios rarely makes anyone any money. We are close to our target prices on our Buy List.
Investors face a number of events in the coming months:
1) US presidential elections and its aftermath, as well as the elections for members of Congress and the Senate on November 8 this year. Markets are pricing in that Mrs. Clinton will win. A surprise win by Mr. Trump may cause markets to correct.
2) The next US Federal Open Market Committee on 13-14 December. We expect the Fed to raise the rate by 25 basis points. Investors can expect a bout of nervousness around mid-December.
3) Inflation. We see the first signs of rising inflation. What will be the impact of rising bond rates on the US Treasury market as well as the European bond market?
4) Elections in the Netherlands, Germany, France and Italy. 67% of the population of the union cast their votes. We expect these votes to have wide implications for local stock markets.