What can we expect from global growth in 2017 and what does the CAPE ratios rise to alarming levels mean for investors. Get all the details in this edition of Steady Investor’s Week…
Global Growth in 2017 – we don’t put too much credence in the forecasts of the World Bank, but in its latest estimation of global growth for 2017, it seems to be in an acceptable range. The World Bank said this week it expects the world economy to expand 2.7% this year, on the heels of stabilizing and slightly rising commodity prices and fiscal stimulus in the U.S. It qualified its forecast by saying downside risks may be significant considering a slowdown in emerging markets investment and political uncertainty. The impact on trade from proposed protectionist policies could also play a role.
Watching the Dollar and the Euro – the dollar has been strengthening since 2014, as U.S. economic growth has outpaced other developed nations and as the Federal Reserve has postured for higher interest rates. With the December 2016 rate hike and all indications pointing to two to four more rate hikes in 2017, the dollar appears to have more room to strengthen ahead. As the Fed tightens monetary policy and inflationary forces seep into the U.S. economy (think fiscal stimulus and lower tax rates), Europe and Japan continue to move in the opposite direction with ongoing QE programs and no indication of rate hikes in the foreseeable future. The combination of these two forces could bring the U.S. dollar to parity with the euro, as it inches closer to a 1:1 tradeoff. If traveling to Europe is on your bucket list, 2017 may be your year!
CAPE Ratios Rise to Alarming Levels – alarm bells were sounding this week as the cyclically adjusted price to earnings ratio hit 28, which is a level that had previously corresponded to tipping points for bull markets. The last time the CAPE ratio went above its current level, the 2008 financial crisis ensued shortly thereafter. The same can be said of the tech bubble bursting in 2000. The recent rise of the CAPE ratio has investors worried that the market is grossly overvalued and it’s time to sell stocks. However, closer examination shows that the CAPE ratio has some glitches in its calculation, and that multiple changes to generally accepted accounting practices have artificially lowered earnings (thereby increasing the CAPE Ratio). What’s more, the CAPE Ratio has been at this level or higher several times in recent history and the market did just fine in the months after. Bottom line: the CAPE ratio alone cannot be relied on as a market indicator.
Farewell Yahoo!, Hello Altaba – investors and consumers can say goodbye to Yahoo, now that the troubled company has completed its $4.8 billion deal with Verizon. Yahoo has undergone a slew of issues in recent months, not the least of which was compromising millions of emails of users. The company was never able to regrow profits and recover its share price under the leadership of CEP Marissa Mayer, and now it’s going away. Mayer and co-founder David Filo will step down as directors, and the company will change its name to Altaba (which is a combination of the words “alternate” and Alibaba).
Hedge Funds Turn Bullish (Too Late) – hedge fund managers had a tough go of it in 2016. As the S&P 500 climbed 9.5% (without dividends reinvested), long-short hedge fund managers declined 4.3%, according to data compiled by Credit Suisse. This marked the worst year for hedge funds since 2011. Perhaps in an effort to avoid missing out on another surge in stock prices, equity long-short fund managers have shifted gears and now hold the fewest bearish stock bets on record. The focus has turned to long positions in portfolios, which may have a marginal effect of adding a bit of fuel to the rally. Long positions are 20% below their five-year average for equity long-short hedge funds, so bringing that figure back to parity could mean adding a nice chunk of cash to the equity markets. According to eVestment, equity long-short funds had $686.7 billion assets under management as of November 2016.
With Trump’s inauguration less than a week away, there is no better time to get an inside look into Zacks predictions for the new administration. Get a deeper look into the current state of the market and forecasts for 2017 in our just-released Stock Market Outlook Report. Download your copy today by clicking on the link below.
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