INSIGHTS

On January 24, 2017

HIMCO’s 4th Quarter Review & 2017 Outlook

For most of 2016, financial markets were heavily influenced by developments overseas leading up to the election. Coming into the year, investors focused on weak growth and currency concerns in China and the sharp fall in oil prices. Oil prices bottomed around $26 per barrel in February and have been recovering steadily since. The Chinese government also responded to growth concerns with a large stimulus effort that stabilized their economy.

The spotlight shifted to Europe throughout the summer. The surprise Brexit vote sent short-lived shock waves through markets. The uncertainty around the U.K leaving the European Union has kept central banks accommodative and the introduction of corporate credit purchases by the European Central Bank has proven to be a large support for U.S. credit assets.

As we headed into the year’s close, President-elect Trump’s victory in the election has proven to be a major market moving event. Since the election, the focus of the investing world has been on quantifying the likely economic ramifications of a Trump victory. This task is not straightforward, as President-elect Trump’s policy views are broad, limited in detail, and may face hurdles in implementation. Trump’s plans for de-regulation and tax reform coupled with his pro-American business stance have driven market expectations of an extended expansionary cycle, increased inflation, moderately higher interest rates, and an improved outlook for growth.

2016 ended as a very strong year for financial assets. The below table is the calendar 2016 performance by asset class:

^{Source: HIMCO, Bloomberg Ticker “USCRWTIC” | Past performance is not indicative of future results.}

^{Source: HIMCO, Haver Analytics}

As we enter 2017, the economy has begun to show signs of acceleration. In addition, market participants are actively starting to price in fiscal stimulus projected to come from the Trump administration. We believe it’s likely that corporate and personal tax cuts are on the horizon. While Trump’s initial views on tax reform are aggressive, we anticipate opposition and negotiation, but ultimately we expect fairly significant reductions. Funding tax cuts by elimination of cherished deductions, or deficit increases, will be politically challenging. Stimulus in the form of infrastructure spending is also expected, but once again limited by fiscal constraints. The implications for the Trump campaign initiatives that are likely to be negative for growth (trade and immigration restrictions) are less clear. All things considered, we believe that the elements of the program that may get implemented should be inflationary on a transitory basis.

We believe the election outcome and associated policy changes are likely to boost growth by 50 to 100 basis points in the near-term (12-24 months) and will be accompanied by higher inflation. The economic cycle has likely been extended marginally, as a result. We also believe that this boost will allow the Federal Reserve to quicken its pace of normalization of interest rates a bit. However, once the stimulative effect fades, we believe it is likely the economy reverts to a growth trajectory similar to that of the last several years as the structural issues such as demographics, high debt loads and over-capacity begin to dominate again.

CRN: 2017-0109-5727R

AAM is not affiliated with The Hartford Financial Group, Inc. or HIMCO, and was not involved in the preparation of this article. The opinions expressed herein are solely those of HIMCO, and do not necessarily reflect those of AAM.