We have a rather light week for economic data. The biggest reports came last week. Earnings season continues. Everyone is keeping a close eye on President Trump, wondering what might happen next. Meanwhile, stocks are at all-time highs and interest rates have stabilized.
While bank loans offer protection from rising risk-free rates, they’re callable and frequently redeemed by the issuer in an improving credit environment, when they generally underperform high-yield bonds. But in a deteriorating environment, they drop about the same as high-yield bonds. They can overcome that negative skew, but only rarely.
When it comes to handling inflation, all companies aren’t equal. Investors could be well served by focusing on what might be one of the most important variables in a rising interest rate environment: a company’s ability to raise its prices.
We have a normal calendar for economic data. There will be important news will come from corporate earnings reports. Since this earnings season is part of an inflection point – the end of the earnings recession– it is special.
I’m starting to feel like a rancorous curmudgeon, but I am frustrated by some of the misguided commentary on asset allocation and how diversification is a myth.
My scorecard for earnings season will look for the following company characteristics: Confidence. I expect most to have a murky outlook, with no reason to set the future bar very high. Important trade relationships – imports or exports. Comments on these fears may create some buying opportunities. Concern about a stronger dollar. Everyone is teed up to watch for this, and we should as well.
The search for investment portfolio returns is not going to get any easier in 2017 against a backdrop of record U.S. equity prices, narrow credit spreads and low bond yields.
Some sort of fund repatriation will be part of the package. All else equal, that suggests a bias to companies that might gain the most. The Atlanta Fed provides some hard data. Expect tax cuts, probably including some nods to Democrats. This will represent fiscal stimulus. Cyclicals continue to show strength, partly from the expectation noted above. (Eddy Elfenbein). The trade war is likely to be a bargaining approach. It is an error to over-react on speculation. The health care issue is far from settled. Early symbolic repeal? Yes. Real changes? Unclear.
Factors ranging from China’s evolving economy to the rise of nationalism combined to make 2016 a year that will not be quickly forgotten.
As part of my preparation for 2017, I asked how I could be most helpful for individual investors. The suggested resolutions are a combination of expert investment methods and avoiding the most common investor mistakes. They may be difficult to follow. If you can, you will find them profitable.