Economic Outlook

The Good, The Bad And The Ugly

Through thick and thin, the economy has stubbornly remained near a 2% growth pace. That said, the Trump administration and 115th Congress are bringing us new angles to consider. We would aggregate them into the (potentially) Good, Bad and Ugly.

Opportunities include regulatory relief and improved governance, a better tax regime and a fiscal boost. These could help banks emerge from excessive regulatory enthusiasm and simplify a complex tax framework that distorts capital allocation. Further, we may see a fiscal boost that, if properly designed, could take the baton from monetary policy, though severe constraints exist as to its magnitude.

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Equity Portfolios

Post-Election Exuberance, As Usual

Triggered by the presidential election, stocks rallied strongly in November and December on the hope that a new administration brings.

Stronger stocks after an election is not uncommon. In fact, the median of the last eight elections since the 50s is a 4% gain from election through inauguration day. This cycle’s gain is a little higher but certainly consistent with the behavior of past elections.

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Fixed Income Portfolios

We Still Prefer Credit Risk To Interest Rate Risk

Through many twists and turns the U.S. Treasury market in 2016 trudged toward modestly higher yields. This rising rate environment may well continue in 2017. Inflation and inflation expectations have crept gradually higher, creating an unfavorable environment for bonds.

 

We continue to maintain a shorter duration in our portfolios than the benchmark, and are overweight U.S. high-yield bonds.

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