On January 19, BDF held its Annual Client Event with over 300 clients and guests in attendance. Andrew Goldberg, Global Head of Client Investment Strategy for J.P. Morgan Asset Management, was the keynote speaker. His presentation entitled, “The Impact of the Election on 2017,” touched on the following themes:
- The tallest tree? While the current U.S. economic expansion is the third longest in history, it is the slowest expansion on record. Thus, there is good reason to believe the economy can continue to grow over the next year or two.
- Fiscal winds at our back. For the past eight years, U.S. economic growth has been driven by monetary policy (low interest rates and quantitative easing). With the Fed now raising rates, future economic growth will instead come from fiscal policy (tax cuts and government spending). President Trump’s economic plan is vast and bold so therefore unlikely to be implemented in its entirety. However, even if some elements are put in place, such as tax reform and infrastructure spending, there will be a fiscal tail wind to keep the current economic expansion going.
- Still time to “stock up.” Even following an excellent year for U.S. equities, stocks can go higher in 2017. While U.S. stocks are slightly expensive relative to their historical valuations, corporate earnings are expected to improve which is a positive for the market. Stocks outside the U.S. also have upside. The U.S. economic expansion and the stronger U.S. dollar (and correspondingly weaker Euro, Yen, etc.) should boost foreign economies. Also, cheaper valuations make developed and emerging market stocks more attractive.
- Rising rates in check. Historically, fiscal stimulus (tax cuts, spending increases, etc.) comes during times of recession such as in early-2009. If President Trump implements portions of his economic plan, fiscal stimulus will instead come at a time of economic expansion. At the same time, with unemployment falling below 5%, wages have steadily increased in the past couple of years. All of this increases the risk of inflation. However, because interest rates in Europe and Japan remain exceedingly low, money will continue to flow into higher yielding U.S. Treasury bonds. This makes the U.S. dollar stronger, combating potential inflation.
- Too hot or too cold. While Mr. Goldberg was generally optimistic about the economy and the markets going forward, he did discuss potential risks. Trump’s economic agenda could fall flat or pass unabated, failing to create a fiscal tail wind or creating too much tail wind, respectively. The Fed could raise rates too quickly or too slowly, putting the brakes on the expansion or allowing inflation to take hold, respectively. Upcoming elections in Europe may continue the trend towards anti-establishment, protectionist policies. And, Chinese and emerging market growth could slow enough to create a global recession.
- Diversify. Mr. Goldberg concluded by emphasizing that diversification still works as it has historically. In each of the past fifteen years, at least one significant and unexpected event has occurred that could have easily derailed markets but didn’t. Had an investor known at the beginning of 2002 that these events would occur over the next fifteen years, would they have invested in the market? Likely not. But, had they not, they would have missed out on a 7% average annual return for a diversified portfolio.
If you are interested in learning more about what was discussed at the event, look for an upcoming webinar by our Chief Investment Officer, Mark Balasa.