Strong Start to 2017

We’re experiencing a positive start to the year as far as equity markets are concerned. The FTSE100 is set to close at a fresh all-time high while the major US indices remain within a few points of their own record closes. This is certainly a big contrast to the beginning of 2016. This time last year equity markets began a sell-off which saw the S&P500 lose over 10% in little more than a month. Back then this was seen as a portent of bad things to come for global equities. Yet the S&P500 made back all its early losses and managed to end the year up over 8%. This was despite such political upheavals as the UK’s vote to leave the EU, Trump’s victory in the US presidential election and the resignation of Italian Prime Minister Matteo Renzi following his inability to win his own referendum on constitutional reform. Yet we managed to muddle through as far as the global economy was concerned. Investors even felt confident enough to take the Fed’s December rate hike in their stride.

But the big question now is if investors will be prepared to pile in further at current levels and drive the world’s major stock indices to new highs? – David Morrison, Market Analyst at Spread Co

But the big question now is if investors will be prepared to pile in further at current levels and drive the world’s major stock indices to new highs? Psychologically, it’s difficult to buy equities when they have risen so much already. Yet there’s also the worry of missing out on further gains. Certainly, as investors managed to climb the wall of worry from last year it feels as if there’s little to hold them back now. It does seem as if the US economy has turned a corner and a number of analysts are convinced that the Trump presidency will prove to be a game-changer. After all, there’s now a businessman in charge at the White House rather than a politician, and Trump has promised to cut taxes, boost infrastructure and defence spending and slash regulations. While there will be losers as well as winners, overall this should be good for the US economy. Whether this feeds through to the rest of us is another matter.

But there are concerns as well. At the Fed’s meeting last month when the central bank hiked rates for the first time in a year, Janet Yellen was asked if she was concerned about the risk of the economy overheating should Trump manage to push through tax cuts and stimulus spending. She said there was no obvious need for such stimulus as the US employment situation has improved recently. In mitigation she also said that such stimulus could help productivity. But Dr Yellen’s reply does suggest that Trump’s campaign promises (assuming they get through Congress) could raise inflation expectations – especially at the Fed. If investors come to feel that the central bank is prepared to raise rates more aggressively than expected, then that could be a big headwind for equities, especially as all of Trump’s policy proposals will add to US national debt. This hasn’t been viewed as an issue thanks to record low interest rates. But if these now start to rise, we could have a problem.

by David Morrison of Spread Co

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