Are Investors Expecting Too Much

(or Too Little) in 2017?

Uncertainty is an intrinsic part of the markets; if one could predict the future direction of the markets with 100% certainty, it would make our job much easier. We combat our inability to know what’s ahead with a belief in a long-term focus that results in a portfolio based on client goals, risk tolerance, income needs, investment time horizon and personal considerations.

When constructing portfolios, however, we understand the need to follow secular and long-term trends and their potential effects. While our base forecast for 2017 U.S. economic growth is 2.4%, there are several themes that could influence this projection either positively or negatively. These are highlighted below.

Inflation Could Surprise

In 2017, we could see a higher than expected pickup in inflation. This could be partially due to continued economic recovery, particularly in terms of a tight labor force as we approach full employment status. There is also strong potential for increased spending under President Trump, especially in infrastructure and defense, two areas on which the administration has stated its intention to focus. We are forecasting an increase in oil prices, which could drive up commodities prices overall. In addition, if significant trade barriers are put in place, this is likely to lead to higher prices for goods and services.

And the Yield Curve Could Steepen

If the events above do come into play, the yield curve could steepen even further as moves in the Fed funds rate are influencing short-term rates, while macro factors are driving longer-term rates. To address this short-term trend, we recommend a tactical position in Treasury Inflation Protected Securities (TIPS) and other fixed income categories which may provide protection in a rising rate environment, such as leverage loans and absolute-return strategies.

The Political Rollercoaster May Not Be Over

In 2016, political events surprised both domestically and abroad, with unexpected outcomes to the British referendum on whether to remain in the European Union (EU) and the U.S presidential election. These events could herald a growing wave of populism globally, contributing to uncertainty. In 2017, there are a number of major elections with EU countries, and their results will provide insight into the trending European political climate.

In Britain, Article 50, which triggers the U.K.’s formal exit process from the EU, is making its way through Parliament. While this will impact the EU, we do believe the Eurozone is stronger economically than it has been in recent years. This is bolstered by the fact that the European Central Bank (ECB) has reiterated its commitment to quantitative easing in order to stimulate growth.

The U.S. is also dealing with several unknowns, which is exacerbating global political uncertainty and potential volatility. This is typically the case in the first part of a president’s first term, as markets often trend lower as they try to assess the future political landscape.

Active Management Continues to Struggle

Recent years have been challenging for active management, with the first quarter of 2016 delivering the lowest ever quarterly outperformance rate of large cap funds versus the Russell 1000®. In contrast, flows into passive funds have been strong, representing 30% of assets under management for the five-year period ending 2015. We believe that active management still plays a strong role in investment management. In our opinion, looking at shorter-term periods is not the best way to assess active versus passive, as performance tends to bounce around, depending in large part on macro factors. In addition, there is a glut of active managers out there. This can make it difficult to uncover the fact that there are managers that have historically outperformed on a long-term basis, although we do feel that over time, it is likely that managers that consistently underperform will not survive, making it easier to find the strong performers. While we believe in the value of active management, we recognize that there are periods of time when active management is not as effective. To address this, we have developed ways to selectively take advantage of the potential of active management at lower prices through strategies such as smart beta, which allows investors to identify and focus on the factors that have been shown over time to result in higher performance, such as capitalization, style, quality, dividend paying stocks, and momentum.

The Positive Impact of Potential Tax Reform

It appears likely that there could be significant corporate tax reform and repatriation. This could provide a boost to corporate earning power. Repatriation could also help by adding cash back into the U.S. This could result in an increase in mergers and acquisitions (M&A) activity, reduced debt, higher capital expenditures and share repurchases. All of these factors could deliver a substantial kick start to economic growth and upside market potential. We believe that the outlook for the economy and the markets is positive and that the considerations discussed validate our view. We reiterate, however, the value of a long-term focus based on individual client goals, needs and circumstances.

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Important Legal Disclosures and Information

The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.


The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.

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