Unexpected and Uncertain
As we look back at the unprecedented year we all just experienced, the mantra of expecting the unexpected would certainly be an appropriate description. While the politics of populism were responsible for some of the largest surprises last year, the market’s reactions to these events could certainly also qualify as unexpected. In reviewing asset class performance last year, we see the drastic shift in themes that drove investor psyche. For the year, the overall risk theme was a profitable position to take, with domestic equities and high yield generating their best returns in years. Given the inauspicious start for risk last year, the complete reversal of those losses was impressive enough, but the market’s ability to build double digit gains in those asset classes was hard to contemplate just 10 months ago. Much of the risk uplift remains in place in a market that appears to want to push gains further. The catalyst for the moves can be considered equally unexpected, with central bank largess, followed by their response to Brexit and then finally the incoming Trump administration, the most visible culprits for the 2016 rallies. Ironically, many of foundations of these catalyst stand in contrast with each other, which the markets have so far been able to overlook, taking a sanguine view of the stronger dollar, higher rates and economic uncertainty created by the incoming administration. The policy priorities of president-elect Trump remain one of the largest market wildcards, with the need to believe that the initiatives pursued by President Trump are substantially different from those espoused by candidate Trump. This is especially true with regard to issues on trade, immigration and the protectionism that we think is ultimately digressive to domestic and global growth. Since we find the priorities of the incoming administration as opaque at best, there will be little granularity until the 45th president starts his term. From this vantage, we don’t see much reason to fade the current bread themes of dollar strength, higher yields drive by rising inflation, and an environment conducive to risk.