2017 Outlook - “Animal Spirits” on Simmer
After stumbling out of the gate this year, global equity markets have put in relatively consistent gains since the February lows. U.S., U.K. and emerging market equities have provided much of the leadership, while markets in the Eurozone and Japan lagged. Unsettled oil prices, Brexit news, Italy referendums and mid-year weakness in corporate earnings results failed to derail the market’s flow. Commodities even joined the act as gains were evident across much of the complex; prices recovered from the multi-year trough levels of 2015.
Post-election trading activity has pushed the mildly bullish trend for risky assets into high-gear as market participants have positioned for the possibility of a more pro-growth business environment. Indeed, early cabinet machinations by President-elect Trump and ongoing policy talk has the market expecting less regulation, less taxes and a shot of fiscal stimulus. The combination could fuel faster growth for the U.S. economy; allowing for the emergence of “animal spirits” not present since before the financial crisis. Material additions to government debt levels, as a result of new programs, and trade constraints may provide notable offsets to the bullish backdrop. So far, market participants have been willing to bid up risky asset prices with little regard for policy details or the potential for any negative ramifications.