Within the U.S., while uncertainty surrounds President-elect Trump’s tax cut and infrastructure plans, we believe they could further bolster the economic forecast. Indeed, the economy has proved resilient in the face of multiple geopolitical surprises.
In addition, a global battle with deflation at last appears to be over. Here the U.S. is also leading the charge as a tightening labor market and increasing hourly earnings propel prices higher. Inflation domestically is on the rise (if flat elsewhere in much of the developed world), which is contributing to a sea change in financial markets..
Improving growth and the prospect of U.S. fiscal expansion is fueling higher inflation expectations. Interest rates globally are liable to recalibrate to reflect this “reflationary” dynamic in 2017, pushing yields upward, causing pain for holders of long-duration bonds. Steepening yield curves suggest investors should consider pivoting toward shorter- maturity bonds within their fixed income portfolios, preserving liquidity and otherwise preparing for increased bond market volatility.
Equity markets are also in flux. Rising global inflation is contributing to a big sector rotation in equities, one we believe is likely to persist into 2017. Laggards like financials have recently soared and while winners could face short-term pullbacks, low-volatility shares that shone in the first half of 2016 (i.e. utilities, telecoms and REITs) may continue to suffer if rising bond yields gather steam. In this environment, dividend growers – companies with sustainable free cash flow and the ability to raise payouts over time without harming their balance sheets – look attractive.