Home | KeyBank | Key Private Bank's Mid-Year Market Outlook

Key Private Bank's Mid-Year Market Outlook

By
Font size: Decrease font Enlarge font
Key Private Bank's Mid-Year Market Outlook

Key Private Bank’s Investment Management Team follows a rigorous and disciplined process as they evaluate markets and manage client portfolios.

This quarterly newsletter highlights their research and strategy teams’ current thinking on the most important trends likely to shape market behavior and serves as a foundation for constructing client portfolios. Inside you’ll find greater detail on their market, equity, and fixed income outlook.

Interest rates to rise modestly over the remainder of 2017
We expect one additional Federal Reserve rate hike this year.

 

Expecting the FOMC to provide more clarity around balance sheet reduction
We expect the second half of 2017 to be dominated by talk of the Federal Reserve beginning to unwind its massive balance sheet.

 

Stronger growth overseas than the U.S.
Stronger growth overseas could allow the dollar to weaken against other currencies, which would increase the value of overseas equities for U.S. investors.

Another strong quarter for equities
Solid earnings growth and elevated confidence along with declining market perception of risk created almost ideal conditions for both consumers and businesses, resulting in all-time highs in the S&P 500.

 

Multiples and markets are likely to march higher next quarter
Absent a change in liquidity conditions, which we do not foresee, both multiples and markets are likely to rise even higher in the third quarter.

 

 

Market Outlook, July 2017

U.S. Large-Cap Equities

The enthusiasm that has driven equity prices higher almost seems boundless. As we close out the second quarter, the domestic Large-Cap market has simply powered through the May-to-June period when investors often worry about a correction. While we perhaps should not look a gift horse in the mouth, we should ask why equity prices have been impervious to any sort of pullback.

Equity prices are essentially a manifestation of public confidence. Thus, it is not surprising that with so many consumer and business confidence surveys reporting multi-year highs, equity prices have continued to march higher. While that does not explain the elevated level of public sentiment, it at least helps to put the market rally into a broader perspective.

Much of the sentiment gains occurred after the U.S. election, supposedly in response to the potential for major changes in Washington. Yet the lack of legislative traction in Washington has not dimmed confidence or halted the rally, even though the potential for broad spending measures or tax reform seems increasingly unlikely. Major policy changes could still be a catalyst for higher equity prices, but it is hard to argue that they are the dominant underlying reason for this rally.

Fundamentals have improved, particularly as earnings rose faster than most investors expected. That story will continue in the coming months, and should help to sustain the equity prices. The growth we have seen does not resolve concerns about high valuations, but it does justify higher prices as long as the economic and market backdrops remain favorable.

The broad global economic improvement may have lifted the public mood. At the end of 2015 and in early 2016, investors believed many areas of the world were at risk of slipping into recession. Not only did we avoid an industrial decline that seemed all but inevitable, we have seen significant growth improvement in many overseas economies. The emotional relief in avoiding a downturn and having that turn into surprisingly strong growth may have done a lot to lift public spirts.

But if a surprisingly good growth created the public exuberance, would disappointments dispel the positive sentiment? To be sure, the overall outlook is solidly positive, but probably not enough to support a euphoric response over the coming months. Earnings growth should remain positive, but seems likely to be increasingly pressed by competitive industry conditions and rising labor costs. Inflation has remained restrained, which should help to limit Federal Reserve rate hikes. But at this stage of the economic cycle, growth seems more likely to slow than to accelerate the way the elevated consumer and business surveys suggest.

While U.S. growth may not improve dramatically, growth overseas has picked up in several regions. That improves the fundamental outlook for overseas. Particularly since stronger growth overseas could allow the dollar to weaken against other currencies, which would increase the value of overseas equities for U.S. investors. Investors would be well advised to consider whether more overseas exposure might be appropriate in their portfolios.

For the complete report - Click here.

KeyBank
KeyBank
Contributor
KeyBank Commercial Banking is focused on helping middle market businesses get the resources they need to succeed. Our relationship managers and industry experts understand the trends that drive the market, providing insights and advice to make managing a business in a complex and competitive environment easier to navigate. Our experience and expertise bring clarity to the issues that impact middle market business leaders, to help manage today’s challenges while planning for the future. KeyBank is Member FDIC.

More from KeyBank