Market Watch for January 6, 2017

Andrew Trimble - Global Portfolio Advisory Group

January 6, 2017

Big Picture

Fed takes wait-and-see approach
It was back-to-work week for many of us and there was plenty for market watchers to digest as we kick off the New Year. Starting in the U.S., minutes released from the Federal Reserve’s December policy meeting had bank officials openly wondering what impact the incoming Trump administration will have on the economy. Growth could be faster or slower depending on the mix of tax, spending and regulatory policies the new administration pursues so the Fed is taking a wait-and-see approach when it comes to interest rates. Turning to economic news, the Institute of Supply Management’s manufacturing index rose in December to its highest levels in 2 years; the latest sign of momentum in the U.S. factory sector. Separately, Markit’s manufacturing index rose to a 21-month high. In China, the Caixin Manufacturing PMI index advanced to 51.9 in December from 50.9 in November. The index is now at its highest level since January 2013 and has been at or above the 50 level for 6 consecutive months indicating expansion in the sector. There was also good news out of the euro zone where a purchasing managers index released Wednesday pointed to better-than-expected business expansion in the weeks to come while consumer prices – a key gauge of inflation – rose by 1.1%, nearly twice as fast as in November and the highest pace in three years. Looking ahead, jobs data comes out of Canada and the U.S. today with the focus south of the border. The Fed cited labour market strength in its decision to raise interest rates last month and today’s print may impact what happens next.


Stocks rise to start the year
The trading year for stocks started in much the same way it ended with equities continuing to march higher. Of note, the TSX is now close to its record all-time high of 15,657 while the Dow is edging close to the 20,000 pts. level having already notched several record highs. For the four days covered in this report, the Dow rose 137 pts. to close at 19,899, the S&P 500 added 31 pts. to close at 2,269 and the Nasdaq moved higher by 104 pts. to finish at 5,487. The TSX moved ahead by 299 pts. to end Thursday’s session at 15,586.


Stay the course
Equities: Investors should be positioned for improving growth and rising yields in 2017, which gives rise to an overweight equities/underweight bonds and cyclical over defensives sector preference. We also advocate a North America over Rest-of-World bias, due in part to U.S. trade policy uncertainty – and we are not convinced of the need to own gold in size in view of potentially rising real interest rates in the U.S. With recession risks muted for the time being (we see the next one being a couple of years away) and the possibility they are further suppressed by potential U.S. fiscal stimulus, we would use broad market pullbacks to add to equity positions.

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