While the country prepares for the first hundred days of a new Commander-in-Chief, contrasting market dynamics warrant a closer look for investors of all types. Whether you’re following the Treasury market or your Twitter feed, here are a few factors to keep in mind when it comes to making investment decisions over the next few months.

Trump-onomics call and response

What exactly underlies so-called “Trump-onomics”? It is the aggregate effect of potential tax cuts, fiscal stimulus and de-regulation, which are presumed to be cornerstones of Trump’s economic agenda.

Unexpected though it may have been, Trump’s election has spurred optimism and firmer consumer and business data globally, raising growth expectations. The end result? A dramatic repricing of yields that has pushed equities and the Dollar higher.

While the bullish tone of risk markets makes sense, our advice would be to avoid overzealousness. A lot of optimism is now priced into markets, and the follow-through in policy and growth fundamentals will evolve slowly, leaving markets vulnerable to disappoint with periodic reality checks in 2017.

Policy follow-through is key

While Trump may be dominating the headlines and hearts of investors, the investment environment remains dominated by global policy concerns.

The macro backdrop is heavily dependent on global monetary and fiscal policy follow-through. Combined with the volatile political landscape, risk markets will be apt to wide swings around fair value.

The big picture is that the Fed has been cautious normalizing the interest rate environment, only raising rates twice in two years. And, looking forward, the December Fed meeting provided a projected path that is only slightly more aggressive than previous Fed forecasts. With these expectations now priced in, rates are fully valued and likely to drift down at the first sign of data or policy disappointment.

Factoring in the future

Taking these dynamics into account, we remain generally bullish, with data and sentiment supporting credit spreads into the first quarter.

Flexibility in fixed income will also be key throughout the year, as there are pockets of opportunity to tactically allocate across fixed income sectors. With the recent rise in short-term Treasury yields, suddenly the risk/reward characteristics for short-term fixed income investors looks very attractive.

Given the uncertainty around implementing the new administration’s policies, the market may have overshot the potential for substantially higher-rates. As the first half of 2017 progresses, look for fixed income performance to stabilize.

For more insight, please visit our Fixed Income Perspectives or reach out to the team at 512-895-4130.

 

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.