The Optimists Take Charge: Spring 2017 Commentary

Stocks across the globe took a decidedly positive step in the first quarter of 2017. The MSCI-ACWI index, which seeks to capture the performance of global developed and emerging stock markets, moved ahead by 6.4%. European and Asian shares outpaced their American counterparts.

Economic data is showing unambiguous improvement across the developed world with the U.S., Europe, Japan and China moving ahead. This synchronous advancement in the world’s big economies brightens the outlook for company profits with some analysts expecting double digit earnings increases for the companies of the S&P 500.

While the recent presidential election provided a catalyst that sparked the market higher since the fall, global economic data seems to have picked up sharply before the election in the summer of 2016. In our view the seeds of the “Trump Trade” were sown in the months leading up to the election and nourished by the tax and fiscal policies promised by the new administration.

The U.S. stock market is trading around 18 times 2017 estimated earnings, a rich price which already discounts much of the improvement in the underlying fundamentals. We expect those fundamentals (rising profits, accelerated economic growth) to continue to improve and so counsel a substantially invested position in this fully priced market.

Stocks overseas, particularly in Europe, are trading at more attractive prices. With those economies now on the mend, we counsel a full weighting to these markets.

The optimistic disposition of the market reinforces our conservative position on bonds. With interest rates far more likely to rise amid improving economic data, we remain committed to investment grade securities with maturities shorter than the benchmark indices.

Economic growth and improving profits dominate our relatively sunny outlook, but there are a few gathering clouds that are worth monitoring. Geopolitical risks, such as the recent provocations by North Korea and populist turmoil in France and Italy are cause for concern. Russian adventurism abroad and the stirrings of Russian domestic unrest are factors which could unsettle markets.

In summary, we are encouraged by the improvement in the global economy and the outlook for corporate profitability. Current U.S. stock prices, while rich, are underpinned by these improvements. Overseas markets possess tailwinds of attractive values and improving fundamentals. While risk is always present we believe the optimists are now plowing fertile ground.

The Altavista Investment Team – Spring 2017

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