1. Will we finally get inflation?
For eight years now global central banks have been working to create inflation via quantitative easing – with little success in the US and outright deflation in Europe and Japan. Trump’s election has rekindled ‘animal spirits’ amongst market participants due to multiple inflationary prospects: billions in infrastructure spending, cash repatriation, tax cuts and immigration reform. However, the market appears too sanguine on the chances of full passage given typical government gridlock. With many stocks fully pricing in reflation, investors need to be wary of heightened expectations heading into first-quarter earnings.
2. Macro or micro?
It seems the baton has finally been passed from monetary stimulus to fiscal stimulus as the Fed fades into the background. The central bank era – whether truly over or not – has been tough for stock pickers as highly-correlated markets move in a ‘risk-on, risk-off’ fashion. Will some of the best trades this year be macro-based or should investors focus primarily on individual company analysis? Year-end 2016 showed that sector rotation was the theme as investors moved out of ‘yieldy’ consumer staples, REITs and utility stocks into basic materials and industrial stocks. This will likely continue and investors need to analyze beyond daily index performance (S&P 500/Dow) as there is plenty of movement ‘under the surface.’
This post was published at FinancialSense on 01/06/2017.