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Stocks & forecasts in a dangerous world

April 10, 2017

by Ralph Cole, CFA
Executive Vice President of Research

Week in Review

April 7, 2017 — Equity markets were relatively flat on the week as economic data was weighed against global events. Interest rates continued their slow trend downward with the 10-year U.S. Treasury finishing the week at a 2.32 percent yield.

The World Is a Dangerous Place

As we entered 2017 there were many hot spots around the world that required U.S. attention. With a new administration demanding a reset on many fronts, no one was quite sure what to expect. Last night the Trump administration launched an aggressive attack on the Syrian airbase thought to be the source of chemical attacks from earlier in the week. Markets didn’t react much to the news today, but did put a small bid into gold, oil and defense stocks.

North Korea is another urgent issue that the administration must address, and will be a big topic of conversation at Mar-a-Lago during this weekend’s summit between President Trump and President Xing Jinping of China. As North Korea continues to work toward weaponizing long-range missiles, it is simply a topic that can no longer be ignored. As a fellow Communist nation, it has always been expected that China would help keep North Korea in check. It remains to be seen if that is still the case, and how the U.S. President will handle this in negotiations.

These and other troubled areas of the globe led us to believe that U.S. defense spending will likely increase in the coming years. We increased exposure to defense contractors last year in both our U.S. and International portfolios. Many of these troubled locations are in areas where oil is produced, and any disruption in oil supplies will highlight the delicate balance of current supply/demand characteristics.

Coming Events

After two relatively flat years for S&P earnings, we expect positive earnings growth in 2017. First quarter earnings season kicks off in earnest next week with several of the larger banks reporting. With stocks up 6 percent so far this year, expectations have increased. Our concern has been valuation, as stocks are trading at cycle highs, and without earnings follow through stocks are susceptible to a selloff. We are not calling for a correction, but realize that odds are elevated along with stock prices.

Takeaways for the Week:

  • We continue to believe defense stocks and energy stocks are effective hedges to global geopolitical unrest
  • First quarter earnings season begins next week, and that may give stocks direction in the coming weeks


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