David Fuller's view -
Welcome to the New Year! The current economic recovery turns nine this summer making it the third longest in U.S. history. However, this calendar-old recovery still appears young at heart. It has not yet sustained a real growth rate above 3%, has never been driven by excessive borrowing or lending nor produced a significant capital spending or housing cycle. Moreover, because it has only recently returned to some semblance of full employment, it has yet to seriously aggravate inflation. Yields about the globe remain near all-time records lows and the Federal Reserve is only now beginning to finally normalize monetary policy. Finally, despite an almost three-and-a-half fold increase in the U.S. stock market from its 2009 low, this bull market has never generated a broad-based public run into equities.
Perhaps for the first time in this recovery, we expect animal spirit behaviors; those originating from confidant businesses, consumers and investors, to increasingly characterize both the economy and the financial markets in 2017. Essentially, this furthers trends already evident during the last few months of 2016. After almost a two-year hiatus, economic growth recently accelerated and broadened about the globe. This rare synchronization in the economic recovery comes just as the U.S. has finally returned to full employment. Consequently, improved economic growth is also aggravating inflation and interest rate concerns.
Although broader economic growth, a restart of the earnings cycle and the election of a pro-business U.S. president have recently combined to boost confidence and awaken the animal spirit throughout the private sector, it also represents a quandary for the financial markets. The stock market begins the year surging to new highs as confidence in the durability of the economic recovery improves. However, the bond market is being battered by rising inflation expectations and recognition that the artificially low yield structure orchestrated about the globe during this recovery may finally be ending.
Here are some specific impressions for the economy and the financial markets in 2017.
The 2017 economic outlook is shaped by many important factors including a synchronization of economic policies about the globe, an economic recovery which is broadening both globally and within the U.S., a refresh and restart of the profits cycle, an end to the global manufacturing recession and collapse in commodity prices, the potential for awakening animal spirits and the increasing likelihood that a
recession is still multiple years away.
Synchronized global economic policies
Not only has global economic growth been persistently subpar, it has never been synchronized. Economic policies typically conflicted during this expansion and economic boats around the globe have seldom risen together. While the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been restrictive. While Japanese policy officials were hesitant earlier in this recovery, today, similar to the U.S., they are implementing full-out central bank balance sheet stimulus. Likewise, the eurozone, which earlier adopted fiscal tightening, is now also fully embracing monetary stimulus. Moreover, the oil crisis has forced Energy-based economies like Canada and Australia, which earlier felt sheltered from many ongoing global struggles, to also boost accommodation.
Consequently, as illustrated in Charts 1 and 2, in the last couple years, policy officials everywhere have simultaneously attempted to improve the economic
recovery. Already, signs of a synchronized global economic bounce are materializing and we suspect this will become more obvious as the year progresses.
There is a lot to like in this global report which I commend to subscribers. After eight years of mostly negative comments, including a number of very bearish reports from so many analysts and strategists, this is the most bullish detailed report by far that I have seen since the 2008 crash.
Market sentiment has steadily improved since Trump’s surprise presidential election. This is despite many alarmist forecasts in anticipation of a Trump administration, albeit mostly from the left-leaning press. Clearly the money men are delighted to see a President-elect who is interested in the US economy, and promises a number of stimulative policies. This has led to a number of upside breakouts, often from multi-year trading ranges from trading ranges, and not just among US indices.
In fact, James Paulsen mentioned “animal spirit”(s) 24 times in the report above. Is that a record? He also mentioned “synchronized” or “synchronization” of economic policies eight times.
This item continues in the Subscriber’s Area where James Paulsen’s report is also posted.
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