Dear Valued Client:
A long-overdue and highly anticipated shift is underway that may change the character of the rest of this
economic cycle. Specifically, the Federal Reserve (Fed) has finally been able to follow through on its
projected rate hike path, including the second hike for 2017 announced at the conclusion of the Federal
Open Market Committee's June 13-14 meeting. This move highlights two important signals - first,
the Fed increasingly trusts that the economy has largely met its dual mandate of 2% inflation and full
employment, but second and of perhaps even greater importance, it appears there may finally be a new
driver - the long-awaited arrival of fiscal policy - that may provide the economic backstop that monetary
policy has offered throughout this recent expansion.
Here are several key themes focused on how the change in market leadership may shift through year-end
and beyond:
- Monetary policy: Slow path to normalization. Maintaining economic growth without extraordinary
central bank support will be key.
- Business fundamentals: Now taking control. A focus on well-run businesses with the potential for
earnings gains may favor active management.
- Economic growth: Confidence not enough, yet. Business and consumer confidence has improved,
but greater policy clarity may be needed to spur growth.
- Fiscal policy: Pro-growth potential, but when? Fiscal policy support remains likely, but the
timetable may be pushed back to 2018.
Even with fiscal policy on standby, the return to business fundamentals, such as renewed corporate
earnings growth, can now act as a market catalyst. The Fed will still have its role to play, but monetary
policy is powering down as the driver of financial market strength. Thus far in 2017, the consistency of
this new fiscal-led dynamic has been uneven, leading to shifting market leadership. It is important for
investors to appreciate that despite these developments, U.S. equity indexes managed to progress through
the first half of 2017 either at, or very near, all-time highs.
As political distractions have periodically surfaced, anticipation of a full transfer away from monetary
policy has diminished and stock market leadership has at times turned away from those areas best
positioned to benefit from the proposed fiscal policies. While the latest delays could push some key fiscal
policy initiatives into 2018, the odds still favor corporate tax reform ultimately being achieved, along with
progress on deregulation and potentially infrastructure at a later date.