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spreads have continued to tighten recently and there is less relative value in credit. Additionally, the stock market appears somewhat extended as 2017 begins. The S&P 500 is currently trading at 17.4x
expected 2017 earnings. This is somewhat high by historical standards and harder to justify on a relative valuation basis given the recent increase in bond yields. The earnings yield of the S&P 500 (using 2017 earnings) is 5.75% vs. the yield of a 10‐year
Treasury which is 2.40%. The difference between these two yields (a higher figure argues for relative value in stocks) has shrunk significantly during the last eight weeks.
POLITICS WILL DOMINATE IN 2017 Given the seismic shifts taking place in Washington and their importance for the financial markets, we must make some predictions regarding political dynamics and policy outcomes in the U.S. The first issue is President‐elect Trump’s proposed $1 trillion infrastructure program. Despite opposition from some Republican elected officials, it is likely that a significant figure (in the hundreds of billions of dollars) will be approved by Congress and new infrastructure projects implemented. This spending will provide a needed spark for the real economy, though it’s likely that the financial markets will be disappointed with the ultimate figure agreed to, which will be far below $1 trillion. This prediction argues against risky assets, which have risen in anticipation of a bigger number, and in favor of safe‐havens.
it seems likely that he’ll push forward on the issue. Resistance to protectionism in Congress is likely to be fierce, however, and the broader business community has yet to begin fighting back in force (this is sure to happen soon). There will be a significant political tussle in the months ahead, but in the end we don’t expect the president‐elect to achieve significant restrictions to trade, though the browbeating of individual companies through the media is almost certain to continue.
In conclusion, we see headwinds for stocks in the near term, though within the equity sector there is decent value in defensive sectors such as consumer staples and healthcare. More cyclical equity sectors such as industrials and materials, on the other hand, are less attractive after their recent run. We expect Treasury yields to The second issue is Donald Trump’s promised trade consolidate in the near term, with elevated restrictions, which, if implemented, would be volatility as the market digests the changing extremely deleterious for economic growth and political dynamics. Treasuries and agency MBS would almost certainly lead to higher inflation. They would also be decidedly negative for both the look especially attractive in the near‐term. stock and bond markets. Some had predicted that — Brandon Fitzpatrick Trump would soften his rhetoric regarding trade after he won the election. He has not done so and