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As we entered 2017, the backdrop was one of tightening financial conditions and a good deal of optimism over fiscal, regulatory, corporate and individual tax reform. Long-term interest rates were moving higher and the Federal Reserve had just acted one more time by raising short-term interest rates by 0.25% while signaling 2 to 3 more hikes for the remainder of the year. The November Presidential election result created an interesting narrative around markets which seemingly further propelled investment gains. If one backs away from the overall noise of the election, a synchronized global reflation had already been well underway since the summer of 2016. This simply means that inflation, interest rates and growth were modestly moving higher in a noticeable uptrend across several key global markets all at once. U.S. equity markets and interest rates powered higher as part of this trend and the election provided an additional catalyst.
Positive Market Influences:
Synchronized Global Reflation -- An oil price rally, strong credit creation impulses and continued monetary policy support all combined to produce an observably higher trend in growth, interest rates and inflation. Whether or not this is a cyclical trend or if the higher levels represent a new paradigm of global growth and a secular trend, remain to be seen.
Consumer Confidence -- Both the University of Michigan’s Index of Consumer Sentiment and the Conference Board’s Confidence Index are at markedly higher levels relative to the last decade.
Small Business Optimism -- The National Federation of Small Business Optimism Index is at its highest level since 2004 and has seen rapid gains in recent months. As with consumer confidence, this type of soft survey data will need to be followed up with operating results over time in order to validate that the business climate is indeed warming.
Negative Market Influences:
Tightening Financial Conditions -- The taper of Quantitative Easing measures is concluded and short-term rates are very gradually being adjusted higher. Long-term rates are similarly moving higher indicating that firms will face higher borrowing costs over time, if the trend continues.
Fiscal and Tax Policy Delays -- Expectations for the pace of policy rollouts in regards to fiscal and tax policy have shifted to the right as difficulties reaching consensus on major features of legislation have emerged.
Valuation Concerns -- Many years of low interest rates have expanded valuation multiples and increased financial asset prices. Now that policymakers are attempting to move rates higher, we are closer to a point where higher interest rates could start negatively impacting the stock market.
*******Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Valicenti Advisory Services, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Valicenti Advisory Services, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Valicenti Advisory Services, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Valicenti Advisory Services, Inc.'s current written disclosure statement discussing our advisory services and fees is available for review upon request.
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