With the bull market now in its ninth year - the second-longest on record – some investors are getting nervous as they await what they believe will be an imminent correction. Yes, valuations are on the high side but from a macro perspective, the performance of the global economy seems to support current market optimism. Inflation is coming back into the system, oil and commodities are stabilizing (despite a recent wobble) and confidence and employment numbers are good in North America and improving in other regions.
“In all major regions in the world – North America, Europe, Asia Pacific and Emerging Markets – things are finally moving in the same direction, and we haven’t seen that in any meaningful fashion since before the global financial crisis,” says Terry Thib, a portfolio manager at iA Clarington. “And, when global PMI moves higher that tends to lead to stronger manufacturing production, which leads to stronger GDP growth. We’re seeing that in a concerted effort across the globe.”
The recovery from the corporate earnings recession of 2014 and 2015 is in full swing and from quarter two of 2016 onwards throughout the year earnings grew sequentially. The momentum is expected to continue this year and is something that Thib describes as “the holy grail” for equity markets, despite valuations.
“From my perspective, these things were at play before the U.S. election: a slow but steady growth in the global economy followed by the earnings recovery, which continues to drive markets higher,” Thib says. “Now the market is cluing in to the potential of lower corporate tax rates and less regulation, which will lead to further growth in 2018. The picture looks fairly decent with the wildcard being the geopolitical risk around Trump’s policies in his first 100 or 200 days in office.”
Thib is following Donald Trump’s policies and comments closely and is hopeful that the new president’s growth spurring tactics can be win-win and not create a trade war. Trump has reiterated his agendas in recent weeks but there is still scant detail around how his administration will fund such policies, which is creating some added market risk. “The market has pulled some of the good earnings potential into the equation, but we don’t know exactly what those earnings are going to look like,” Thib says. “Will he be able to get his tax cuts in place in the time window that the market is expecting? And, will those cuts and the deregulation be smaller than expected?”
“You have to look at this whole thing as a complete package and it has to be revenue neutral. If you cut corporate taxes, you have to pay for it somehow; you can’t just bloat the balance sheet even further. We’ll have to just wait and see.”
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