An Early Christmas


by Shawn Narancich, CFA
Executive Vice President of Research

Santa Claus Arrives Early

 In a relatively quiet week on the company news front, investors welcomed a series of new highs on the S&P 500 that have pushed the benchmark index to price gains now exceeding 10 percent on the year. Consumer and executive confidence measures continue to climb since the election, foretelling a better business climate that has economists increasing their GDP estimates and money managers gauging the potential for upside to corporate earnings estimates. For our part, we remain measured in our evaluation of the capital markets, remaining neutral across all major asset classes pending further details about how planned fiscal stimulus may play out under Republican leadership. What we know at this point is that equity valuations have become more expensive since the election and that change at the margin in D.C. won’t happen immediately. While executive orders can be rewritten as soon as Trump takes office, new legislation that is likely to remake the personal and corporate tax code will take longer, and likely won’t become effective until 2018.

Taking Europe in Stride

On the other side of the Atlantic, the Italian constitutional referendum that voters rejected over the past weekend ended up being but a footnote for investors this week, as did the prime minister’s subsequent resignation. What gained more mindshare and ended up preceding substantial gains in European equities was the European Central Bank’s announcement that it would extend its quantitative easing program by another nine months, beginning April 1, 2017. The debate afterward is what to call it: a lengthier-than-expected extension of QE, or tapering of the existing program? Both are accurate in their own ways, but no matter the semantics, what we would observe is that monetary policy across the pond remains “easy,” and increasingly contrasts with that of the U.S. Fed, where Yellen & Co. are in the process of slowly raising rates. Yes, we expect the Fed to move on rates next week; what remains in question is what the Fed might observe about the U.S. economy at this point and the pace at which they would expect to continue raising rates in what to date has been a frustratingly slow expansion.

 75 Years Later

Against an increasingly jubilant backdrop for the U.S. equity markets, Americans took time this week to recognize a significant milestone: the 75th anniversary of the surprise Japanese attack on Pearl Harbor. We pay homage to those veterans who gave their lives on that fateful day of December 7, 1941, a day that then-President Roosevelt famously observed would “live in infamy.” While also reflecting upon the hundreds of thousands of additional veterans who would give their lives to winning World War II, the author of this piece pays his respects to those members of the “Greatest Generation” and fondly recalls the client acquaintance made in a previous employment; that of a man who played a notable role in helping the U.S. and its allies win the war that Pearl Harbor ensured the U.S. would join. I will always remember how humbly and somewhat reluctantly he recalled the spellbinding story of the bombing run he made in the South Pacific where his Navy plane dropped the torpedo bomb that scored a direct hit on the Japanese battleship, “Yamamoto,” which as he recalled was already under heavy Allied attack. The subsequent sinking of this Japanese vessel was a significant milestone in the Allies’ effort to take control of the Pacific theater and ultimately win the war.

Our Takeaways from the Week

  • U.S. stocks continued the “Trump Trade” to new highs amid optimism that tax reform and deregulation will stimulate faster economic growth
  • On the 75th anniversary of Pearl Harbor, we honor those 2,403 veterans who gave their lives in defense of the country that fateful day