Looking back at 2016 it looks like we had a remarkable year.  The year did not start off so bright though.  Facing a slowing economy and a drop in corporate profits America equity markets started the year off slowly.  Those concerns caused a rush of money into safe haven assets.  From Treasury bonds and boring sectors like utilities and consumer staples stocks, safe haven assets outpaced more growth oriented areas.

Things started turning around in the second half of the year.  The economy began to re-accelerate; corporate profits turned black after almost two years in the red; and companies started hiring again.  The dramatic turnaround in these three factors, along with numerous other leading data points we look at, was noticeable.  This turnaround wasn’t just seen in our charts and spreadsheets, we felt it. Americans started to get more confident about the economy and that looks like it has led into a strong holiday shopping season.

There are many positive factors that could help growth continue.  The coordinated stimulus efforts by major central banks have helped and could continue to provide fuel to this growth.  New policies from a Republican controlled Congress and White House could also help.   Tax reform?  A major spending bill?

Of course there are many concerns too.  For the first time in a long time the apparent slack in the U.S. employment situation is nearly gone.  So continued growth may bring up other factors; namely rising inflation, interest rates, and US Dollar.  On some fronts the American consumer is quite strong.  Rising wages and better balance sheets. But on other fronts we’re starting to see rising delinquencies across several loan categories. What will higher interest rates mean for these borrowers? Again, new policies from a Republican controlled Congress and White House could bring problems.  Trump’s view on trade policy has already started to take shape.

With all that said, we have noticed the pickup in growth in the past few months.   Many changes have been made to your portfolio to reflect that.  Changes to your equities and fixed income holdings.  These growth conditions could lead into a strong 2017.  There will always be “fat tailed” risks out there. But after a weak 2015 and first half of 2016, those tails are fat on both sides of the bell curve

Have a great New Year!
Mark Iwamoto, CIO
Benjamin Lau, CFA, CIO