Shocks, Surprises, Stumbles and Tumbles...
And then a welcomed uplift leads us all firmly racing towards the end of the global economic turmoil of 2016. Our proud mantra here at Salt Financial Group is ‘to confidently lead you through financial and economic complexities’ by continuing to provide our professional financial guidance and support to you, our valued clients.
Things certainly didn't always go as expected during 2016. The U.S. election, U.K. Brexit vote and the Fed's U-turn on rates took many investors by surprise.
Yet worries about runaway volatility proved unfounded. And some asset classes posted solid gains, defying pessimism in relation to the state of the global economy.
Risks abound in unsettled times, but so do opportunities – for those willing to look past conventional wisdom.
The Brexit and Trump wins underscored the rise of political sentiment favouring protectionism and middle-income growth at the expense of economic efficiency and expansion via global trade. Implicit in this inward turn: a possible pickup in fiscal stimulus, which in turn would require increased government borrowing — a hot-button issue in Europe as well as the U.S., where many factions resist adding to already-substantial sovereign debt.
The worries for the year are clear: Inflation could begin an upward spiral as a result of increased spending by Washington, which could combine with tax cuts to drive up the $19 trillion debt burden. Outside the U.S., Japan's continued aggressive spending, combined with its still-expansionary monetary could continue its failure to ignite growth and instead cripple its future; and China's financial system could struggle to assimilate new levels – and kinds – of debt.
But what if rates, politics, and growth align in a virtuous rather than vicious circle? If so, U.S. equities may be right in reflecting the probability of a brighter future with continued earnings improvement; and the resulting inflation could reflect resurgent demand outstripping supply, a welcome change for corporations.
The burden of recovery from the financial crisis has fallen largely to the world's major central banks. The World Bank and IMF remained committed to austerity in Europe, and the U.S. Congress kept its balanced-budget goal in place. China, on the other hand, fuelled its massive infrastructure and real estate spending with its world-beating foreign reserves and internal borrowing.
To fill the gap left by fiscal restraint, central banks' role quickly expanded from providing liquidity to support the financial system to getting the world's economies back on track. Yet there's a growing consensus that their tactics are growing less effective. The eagerness with which financial markets greeted the prospect of fiscal largesse as fulfilment of Trump's campaign promises offered some indication of markets' readiness to overlook the impact on the budget – and general lack of specifics. That said, the mood of financial markets appears clearly in favour of giving fiscal remedies a turn at bat, at least in the short run. Or until the bills start coming due.
The rapid shift in financial markets since the U.S. elections serves as a powerful reminder that a shift in the story can make all the difference. Without enacting a single piece of legislation or issuing an executive order, Trump's election has transformed the emotional landscape.
Instead of reacting slowly as changes in fiscal policy unfold, U.S. equities act as if the changes have already taken place – despite any political headwinds they may encounter. The same is true for the U.K., where the form and timing of its departure from the Eurozone are far from certain, yet the British pound remains well below its pre-referendum levels.
In emerging markets, the fear of tariffs that could take years to enact has driven "hot money" out of economies where fundamental prospects remain strong – leaving only a few well-nourished babies in their tubs after most of the bathwater has gone down the drain.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
Yields and dividends represent past performance and there is no guarantee they will continue to be paid.
Source and References: Bloomberg 28 Nov 2016 & Legg Mason 22 December 2016