The pundits/naysayers are at a loss for words as the global stock markets continue to confound them as they march upwards. The global economy is surprising the experts too, as growth estimates continue to lift for this year and next. Inflation expectations are now at the center of the debate within the financial community, as inflationary pressures have not risen as growth has accelerated and unemployment has declined meaningfully.
Janet Yellen changed her tune this week. She now appears much more concerned that low inflation may not be transitory. That has been our view, all along.
We remain in the sweet spot with accelerating growth, increasing earnings estimates and lower than expected inflation and interest rates at this point in the cycle. This does not mean that the yield curve will not continue to steepen. It will until the monetary authorities declare victory and reduce meaningfully their overly accommodative monetary stance. But that won’t happen anytime soon as we expect all of them, including our Fed, to remain one step behind until they gain a clearer perspective on where inflation is going down the line. It is much harder for them to fight deflation with interest rates so low and their balance sheets bloated than to fight inflationary pressures. Now you can understand their reticence in shifting their policy too soon.
On another note, I want to applaud Jimmy Dimon’s (Chairman of JP Morgan) comments Friday on how embarrassing it is to be an American because our politicians in DC can’t come together and enact policies that would benefit our country and its citizens. How often have we said that it is amazing how strong our economy and stock markets are despite all of the headwinds out of DC. While I don’t know if growth can accelerate to 3% as Trump and his team suggest if his policies were passed, it clearly would accelerate from the 2+% path that we have had over the last few years. And our stature/influence would rise in the world too.
Did you see JPM’s and Citi’s earnings reports? Record earnings despite a relatively flat yield curve. The best is yet to come for the financials for a multitude of reasons that we have been discussing for months. Financials remain one of the largest percentages in our portfolio. BAC is up next this week.
The IMF lifted its economic growth targets once again to 3.5% in 2017 and 3.8% in 2018 up from 3.1% in 2016. Europe has been the most surprising positive region followed closely by Japan. We expect China, India and the Emerging markets to surprise on the upside too. Unless Trump’s pro-growth, pro-business is enacted into law, we expect U.S. growth to stay stuck in the 2+% range even with all of the executive orders signed by Trump, reduction in regulations, growth in employment and benefits to be realized by his trade policies. If you were senior management of a U.S. corporation, would you alter spending plans now or wait to see what/if any of Trump’s agenda is enacted into law? Personally I’d remain cautiously optimistic and refrain from major changes for right now.