Looking forward to 2017, we have equities at all-time highs, improving economic growth both at home and abroad, better corporate earnings, and increasing inflation expectations. U.S. companies are pledging to invest again after years on the sidelines. Executives have grown more optimistic about growth in part anticipating that President-elect Trump’s administration and Republican congressional majorities will bring regulatory rollbacks, corporate tax reform and increased infrastructure spending. After years of near-zero interest rates, markets are upbeat on the possibilities that banks will benefit from higher interest rates and that less regulation and lower taxes will help the economy overall.
Internationally things are a little less clear heading into 2017. European political risks are rising after the Brexit vote and the Italians rejected a constitutional referendum that caused the resignation of its Prime Minister. The outcome is seen to embolden anti-establishment parties across Europe which may impact elections this year in France, the Netherlands and Germany. If populist candidates triumph in coming elections, the prospect of a Eurozone break-up could return to markets. Thus far, however, the UK has seemed to benefit from their exit; the FTSE 100 was among the world’s best performing stock markets in 2016, up 19.1%. For its part, the European Central Bank remains highly accommodative, buying back bonds in an attempt to lower interest rates and inject liquidity. The euro has reached its lowest level against the dollar since 2003. A combination of a weak euro and rebounding global economic growth could be a good setup for Europe as we enter 2017 despite political turbulence. European stocks have lagged behind their U.S. peers in recent years, however, many analysts expect this trend to reverse.