Q1 2017 RECAP

abril 7, 2017

A new U.S. administration. Equities in spotlight, EM a positive surprise. The 1^st quarter: Optimists outnumbered pessimists by a wide margin, as change in Washington does not happen every year. That said, it’s important to distinguish between political rhetoric and economic data. Simply, as Fed chair Yellen stated later, the economy is doing well. Simple but powerful words because of what it implies. Not calling a 2017 recession is well beyond consensus. One observation made was this is the first time since the 1960’s that an economy at or near full employment may be spurred by fiscal stimulus. Consumer confidence has seen a vertical rise, and small business surveys confirm the view. This week’s GDP revision attests to the strong momentum with which the economy entered the New Year. Thus, a very high level of theoretical optimism is beginning to translate into real numbers.

The past 90 days saw a memorable month in global stocks, with flows finally turning to favor stocks over bonds. That is not the same as a rotation from bonds, but does mean that new money is moving toward risk-assets, more growth vs. defensive assets. In these 90 days, global institutions whose purpose is to determine economic growth have revised figures to the upside – not the pattern the previous three years, before and after the collapse in oil prices. An earnings recession after five consecutive quarters ended in the second-half of last year. Looking ahead, expectations are for a much better report on earnings and revenue. Important, as revenue has lagged for a good portion of this bull rally. In the U.S., performance has not been uniform. Nasdaq’s been the superstar. However, even laggards had a day in the sun. Transportation stocks trailed, but rallied late as evidence accumulated the economy continued to strengthen. What lies ahead is unknown, but markets are discounting the post-crisis pattern of sub-par Q1 GDP, largely due to seasonal quirks and sharp rebounds through mid-year.

In Europe, the heavy clouds on the economic front have subsided. Politics has taken center stage, diminishing a part of the continent’s progress. For the 1^st time in recent memory, the two largest economies, Germany and France, hold national elections in the same calendar year. A rarity, but also an opportunity depending on the outcome. The Dutch vote this month may be a precursor, and maybe not. The consensus view, based on the spread between bunds and oats (bonds), showed greater concern of upheaval two months ago than at quarter-end. Will an anti-establishment French vote upset the apple cart? Unknown, but all signs point to that event as the main catalyst not only for Q2 but likely the remainder of 2017. European bourses closed the quarter strong, reversing a weak start, and appear to indicate the upcoming vote will not undermine the Treaty of Rome, which celebrated its 60^th year last week. It is against that backdrop that European equities have seen a turn in returns, flows, and valuations. In more than a bit of irony, the United Kingdom chose the same week to leave the EU after 40 plus years of partnership. On paper, process is to take 2 years, in practice, TBD.