Trump: Raising Uncertainty 140 characters at a time

Published by on

Here we go! Off into the uncharted waters of 2017. Although there is certainly a lot to be cautious about this year, we also see many reasons for being optimistic.

On the Economy and Markets…

The first couple of weeks of the Trump administration have definitely been newsworthy.  While it is easy to get caught up in the news cycle, as investors, it's important to take a step back.  While Trump's economic, immigration and foreign policies are important, as of today, they are extremely difficult to quantify.  What we can quantify is economic growth, company earnings, and valuations. These 'measurable' variables paint a different story than what is being captured by headlines. 

Click here for a video update from Philip Petursson who we interviewed for a blog late in 2016.

1. Economic Growth:  In our opinion, the single greatest measure for 'real time' economic activity is the Global Purchasing Manager's Index (PMI).  In January 2017, major global economies grew at rates we(US, Europe, China & Japan) had not seen over the past two years.  We focus on the PMI because it is a very good leading 6 month indicator for earnings…

In layman’s terms = we expect global economic growth to pick up

2. Earnings: In the US, earnings grew at 3.1% in Q3/2016, the first time we had positive earnings growth in five quarters.   So far in Q4, S&P 500 company earnings have been growing at ~14%.  Our work suggests that S&P 500 earnings should grow in the lower teens going into summer 2017.  While we are early in Canada and International earnings, we believe that earnings growth will be positive, similar to the United States. 

In layman’s terms = companies will earn more this year

3. Valuations:  A variety of valuation metrics (P/E, Rule of 20 [incorporates inflation and P/E], GDP/Market Cap) point to global markets that are neither cheap nor expensive, but fully valued.  It's important to note, valuations do not kill bull markets, recessions kill bull markets and as of today, there are no signs of a recession. 

In layman’s terms = Stocks are neither cheap nor expensive. If companies earn more they should be worth more and therefore it is possible for stocks to increase in price from this level.

In 2017, we believe the volatility will continue similar to 2016 as there are several political and market related catalysts ahead of us. We believe that the economic environment will continue to support earnings and a positive year for global equity markets.  However, given the political climate, we advocate that investors never forget their defense. In this environment, we believe that means a balanced asset allocation.

In layman’s terms = As with most years, we expect the stock market will be up and down this year which should present some opportunities. 

 

Interesting News-bit For The Month

Why Chickens Are Twice As Big Today As They Were 60 Years Ago = SCARY!

2017 was a record year for chicken consumption (an average of 89.6 pounds per person). That’s more than three times as much as our grandparents ate.  Chickens we eat today are twice as big as they were 60 years ago. In 1955, the average weight of chickens sold was 3.07 pounds, while in 2016 it was 6.18 pounds.

Why? First, chicken breeds today are more cost-efficient than 60 years ago. In order to shorten production cycle and cut cost, the selective breeding for broilers (chickens raised for meat) prefers faster growth rate and higher feed-to-meat ratio — meaning the pounds of feed it takes to gain one pound of meat.  The time it took to grow a newly-hatched chicken for market has been cut in half since the 1990s to only less than 7 weeks from 16 weeks in 1925.The trend started with the 1948 contest that invited farmers nationwide to develop the “Chicken of Tomorrow” with specific goals — bigger, meatier, faster growth. As a result, Arbor Acre breed, the crossbreed of the two winners, has become the grandparents of most commercial meat chicken we eat today worldwide. 

There were massive genetic differences as a result of selective breeding by raising chicken breeds from different eras under the exact same conditions, a 2014 study by researchers at the University of Alberta, Canada, observed. The result was stunning: At the same age, the 2005 breed had grown to about four times as heavy as the 1957 breed, despite being fed the same food.  Secondly, chicken companies have also achieved higher efficiency in their raising process — both in terms of quantity and size — through economies of scale and evolved poultry science.  Nowadays, most chickens spend their whole lives in a small confinement together with thousands of others from birth to death, with no possibility to roam or even move. They are raised to reach the “slaughter weight” as fast as possible through excessive feeding and lack of exercise. Although hormones and steroids in the poultry industry are prohibited by the Food and Drug Administration, antibiotics are regularly used by farms as growth agents.

 

Source for market-related data in this post: "Investment Note," Manulife Investments, January 2017