January 3, 2017

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  • U.S. stocks turned in another year of positive performance, extending the current bull market to almost eight years. The S&P 500 returned 12% leading all other major regions helping to cement U.S. equity dominance over global markets.
  • Emerging markets had led all regions up until the November election where they experienced weakness over concerns that global trade would be restricted under the new U.S. administration. Japan and Europe continue to face structural issues of low nominal growth with the latter now experiencing a surge in populist sentiment following the Brexit referendum vote and ongoing migrant crisis.
  • Investors expressed a thirst for yield and defensive (low volatility) assets during the first half of the year as the macro environment remained highly uncertain following China’s January devaluation of its currency and renewed capital concerns of Eurozone banks.
  • However, central banks, which had been pursuing negative rates, shifted policies to engineer steeper yield curves (longer rates higher than shorter rates) to support profitability of lending institutions. This started the reflationary trade that steepened global yield curves and accelerated following the U.S. election in November leading to one of the worst monthly returns for global bonds.
  • The markets have now priced in high expectations that the new regime in Washington will produce a more business-friendly environment through deregulation and lower taxes. This renewed demand could drive labor costs higher which would feed into final prices prompting the Federal Reserve to become more aggressive in its rate tightening.
  • Whether the cyclical reflationary forces can overwhelm the structure disinflationary environment caused by aging demographics and high debt levels will determine the longer-term course of equity and fixed income valuations.

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