When will improved economic activity from Trump Administration policies materialize? We believe, to some extent, later this year and more fully in 2018 (Figure 1).


How much will earnings of S&P 500 companies benefit? While that depends on the specifics of corporate tax rate changes, we believe that improved economic activity from the new administration's policies could lead to an increase in S&P 500 earnings growth from 4% up to 8%. The real focus for investors is earnings growth, as higher stock prices are driven by higher earnings.

Stocks have, however, already anticipated much of the positive earnings growth and valuations reflect this. For that reason returns for the rest of the year are likely to be in the range of 4% to 6%, with a total 2017 return of about 6% to 8%.

When will higher interest rates negatively impact stocks? Monetary policy will likely be less friendly going forward, but surprisingly, gradually rising interest rates are usually beneficial for the economy and equities during the first year. What happens in the second year depends on the speed and magnitude of rate hikes. Modestly rising interest rates will be a challenge for Investment Grade bonds and that is why we believe our opportunistic investments in various non-Investment Grade fixed income strategies will generate better total returns for fixed income investors.

Optimism is rising and reaching multi-year highs. This indicates that consumers, businesses and government are all in synch, leading to an enhanced level of GDP growth in 2017 and 2018. We believe this trilogy of optimism will lengthen the current economic expansion (already at 91 months and the fourth longest in our history), giving it a good chance of surpassing 100 months, and in our opinion, reduces the odds of a near-term recession to less than 25%.

It is important right now to differentiate political rhetoric from rational economic behavior. Our observation is that while consumers and business decision makers are aware of the unique political environment, neither group has really changed their economic behavior.

The primary area of concern is trade, and here we are hopeful that no trade war will arise between the U.S. and China (or Mexico) which might alter our generally positive outlook.

Although many investors have shunned emerging market equities, we have held our positions because we believe that uncertainties about global trade will not alter the internal dynamics in our favored EM region, Asia. In fact, after being flat in 2016, EM Asia equities are by far the best performing equity asset class so far in 2017, rising more than U.S. equities. We expect EM Asia equites to experience more volatility yet achieve an 8% to 10% total return this year. Meanwhile, slow growth and uncertainties over upcoming elections in Europe remain, and consequently we continue to prioritize equity investments in the U.S. and EM Asia over Europe.

All returns cited are in USD. Index returns include the reinvestment of dividends.

Index Definitions

The Standard & Poor's (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund's performance.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

Investments in below-investment-grade debt securities, which are usually called “high yield" or “junk bonds," are typically in weaker financial health and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market.

Past performance is no guarantee of future performance.

This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly owned subsidiary of City National Bank.