Financial markets and the economy had an up and down ride in 2016. From “Brexit” to the “Trump rally,” the U.S. stock market finished up for the year despite change. Let’s take a look at some of 2016’s more important aspects as we prepare for 2017. Included is our last “Market Trends Report” of the year which will be available to all each Tuesday afternoon in 2017.
Brexit, Populism & Trump
Among the most important trends of the year was the rise of nationalist populist movements around the globe. Challenges with what we have called “mega-trends,” such as aging demographics and global debt have turned many people inward. Globalism has become a dirty word despite the globe having fewer people in poverty than ever before.
Source: World Bank Povcalnet
Historically, populist movements have been very damaging to economies and peace. So far the markets have taken it mostly in stride. Despite large, but not massive, sell-offs in stocks after Brexit and the election of Donald Trump to be U.S. President, stocks have recovered. In the U.S. all the major indexes have set and are sitting near new all-time highs.
The nationalist populist movements across Europe seem to be the most dangerous as they threaten to break-up the Eurozone. If the EU breaks apart that would create turbulence in financial markets and in geopolitical structure. This is something to keep a close eye on in 2017.
Technology Keeps Evolving
The past 30 years have had massive technological change. Today’s middle age adults are the last generation to live without the cell phone. Indeed, cell phones might be the most transformational invention ever.
Source: World Development Indicators
Across the technology spectrum there are game changing advances set to change life even more. Those changes are what people must navigate to survive and thrive. It’s why we take the tactical view not only to investing, but really to life. Investing and life are both just an ongoing series of adjustments that we hope to do wisely.
What have we seen in 2016? Here are a few breakthroughs that MIT is tracking:
- Immune Engineering which is the alteration of our own genetics to treat disease. This has massive potential to change medicine.
- Conversational Interfaces that allow us to use our smartphones, or wearables, even more efficiently.
- Robots that teach each other which would be immensely disruptive to the labor force.
- Solar’s move into mass low cost manufacturing. Reigning in costs has been the challenge for solar for decades. Solar might be about to go mainstream if it can cut costs another level.
- Electric cars are one or two more generations from mass adoption. Better batteries and autonomous driving are only a matter of time.
All of these ideas can have a monumental impact on lives and portfolios. Throw in artificial intelligence, space travel, quantum computers, advancements in computer processing and the technology age shows no signs of slowing down.
OPEC & Oil
The collapse of oil prices in 2014 and 2015 set up this year’s rally in oil prices and stocks. From lows under $30 per barrel, crude has surged into the middle $50s. Many oil stocks have risen far ahead of the broader markets.
Beginning in late summer, OPEC started to reassert is control on global oil prices. By having crushed over a trillion dollars of CAPEX from oil companies deep water and oil sands megaprojects through 2020, oil supply and demand are quickly coming into balance. According to the EIA, even before the recent OPEC production cuts, oil supply and demand were projected to balance at about 98mbd.
By bringing oil back into balance, prices are sure to rise. Even with an increase of U.S. output, the decline rates from deep water oil of about 3mbd in 2017, will challenge new output. The OPEC cuts, to the extent they hold for the agreed upon six months should glide into the deep water declines and the U.S. driving season.
The goal of OPEC is to raise the price of oil to above $70 per barrel, without triggering new long-term oil development. They could succeed as financing for long cycle megaprojects is challenged. The impending IPO of Saudi Aramco would be no small beneficiary of rising oil prices.
Oil stocks and oil equipment stocks have been a recent big winner from the rising and firming oil prices. Here is a chart with Global View Capital Management’s tracking of the oil equipment index:
The big news for currencies was the breakout of the dollar. The strength of the dollar is having major impacts on bond markets globally. Emerging markets, including China, have been forced to sell dollars to maintain their own currencies. Liquidity is seen as becoming challenged.
One key strength of the dollar is that it is the currency of oil. The “PetroDollar” has been in place since an early 1970s deal between America and Saudi Arabia. That arrangement is beginning to fray as several countries started to trade oil in currencies other that the dollar.
One example of the fraying of the PetroDollar is that Russia is taking Yuan from China for oil. This is certainly on incoming President Trump’s mind. Saudi Arabia is likely to start to taking Yuan at some point soon. To maintain dollar strength, the PetroDollar must survive at some level.
The Euro has approached parity with the dollar. Given the broken finances in much of Europe this comes as no surprise as many have forecast this event for two years now. A further fraying of Europe could drive the Euro even further down. Another outcome could be a smaller, but stronger European Union, in which case, the Euro could rise. Suppose if the Southern European nations created their own sub-zone? Watching the developments and adjusting accordingly will be important as the Euro impacts the entire global trade picture.
Global trade has been hard to maintain since the financial crisis in 2007-09. Without growing global trade, economies will be hard pressed to improve standard of living for their citizens. This is a major problem for those with nationalist notions.
The dollar will have a huge impact on how global trade develops in the next year. Also, the development of global infrastructure will play a key role as well. We will see if the plans of President-elect Trump get approved by Congress to rebuild much of American infrastructure. There is still plenty of building globally that can be done as well. For example, sewer and plumbing could use a massive upgrade:
Source: World Development Indicators
The point being, there is no shortage of work that could stimulate global trade and improved standards of living. We need to make it happen though.
Personal finance has never been such a hot topic. It trends on the internet as bloggers and financial advisors pound the internet with messages.
One of the key messages to Millennials was to stop spending foolishly. The AICPA found that impulse buying thwarted their savings. This isn’t new of course. Baby Boomers are woefully under-prepared for retirement for largely the same reason.
Fintech is also on the rise. More and more people are using “robo-advisors” to manage their money or indexing. While that might be fine for those in early savings mode, we are concerned with the impact on most Americans.
Frankly speaking, we are seeing more opportunity to beat markets precisely because so many people are indexing and allowing algorithmic robots to manage their money. As more people get to one side of a boat, you know what happens next. Our tactical approach seems to be getting validated every week.
Market Trends Report
Trends within the markets are often the most reliable indicators of upcoming asset price movements. From Larry Livingston to today’s data driven world, “the trend is your friend” has made and saved many investors money. In this weekly report, Global View Capital Management, Ltd. along with its research partners, lay out some of the most important market trends investors need to know.
This week we build our Market Trends Report into our year-end review. Here are the bullet points:
- The financial sector is ranked #1 and is showing a one month return of over 4.7%.
- The Dow Jones Industrial Average is also near the top of the charts as large companies are rallying for now, led in large part by Apple.
- Value is leading over growth.
- Oil equipment and services is a leader, along with the broader energy complex.
- Telecommunications has rallied, possibly on the belief that “net neutrality” rules will be amended to allow the telecoms to charge the big bandwidth users, i.e. Google, Nextflix… a higher rate to support expansion of services.
- The money market is slightly more attractive this week than last, however, there are still other better alternatives to put money to work.