Current Outlook: Be careful, but not fearful
While the world is experiencing the first synchronized global expansion since 2003 and asset price inflation continues apace, the challenge for investors is to look somewhat in the rear-view mirror and make sure they understand the risks of euphoria. Many of the issues that we have had to deal with since the 2008-2009 financial crisis have been resolved in a positive way. Banking has become much more stable due to the revised capital requirements. While loan growth has only now started to show a healthy recovery after eight years of so-so results, investors remain cautious about the longer-term outlook. Revenue growth of businesses has been sluggish reflecting abnormally low inflation rates. At the same time, central bankers around the world are beginning the long process of “removing the punch bowl” from the investment party that has seen asset prices rise more rapidly than economic growth since 2009.
We have been suggesting to our clients to continue to be “careful, but not fearful” when looking at their asset allocations and diversification strategies. Since relative asset valuations depend primarily on economic growth rates (the higher the better), interest rates (the lower the better), and inflation (stable preferably), it is important to have a point of view on these three variables before constructing a long-term investment strategy. We have been positive on all three of these trends since 2009 as we experienced fiscal and monetary policies around the world that bolstered those forecasts. We are now seeing evidence that the future trend of interest rates and inflation will be doing battle with economic growth for the first time in a long while.
For those reasons, our current outlook becomes much more muted. The synchronized global expansion that we referred to earlier will do much to maintain the rate of economic growth (or better) that we have seen in the recent past – roughly a range of 2-3 percent domestically and 3-4 percent on a worldwide basis. This is good news. The other two variables do not show a comparable positive trend. Already economists are noting the slow, but relentless tightening of monetary conditions. It started with the U.S. Federal Reserve Board actions to cut back on purchases of government bonds. That was followed by the gradual raising of short-term interest rates. It culminated recently in the disclosure of its intention to actually start selling the stockpile of bonds that it has accumulated. These are all actions designed to raise interest rates to combat a perceived increase in underlying inflation. Even monetary authorities outside the U.S. are beginning to talk about reducing stimulus.
When combined together, the threat of rising interest rates, even slightly, should be a wake-up call to revisit asset pricing. While overall economic growth is still expected to be positive for the balance of 2017 and all of 2018, the specter of even a modest rise in inflation and interest rates could dampen returns from both equities and fixed income securities. At the same time, the performance of the economy may not be the only determinant of asset returns. We continue to monitor the changes in policy directions coming out of Washington, D.C. Whether we see the tax reform, de-regulation and infrastructure spending that was hoped for at the end of 2016 remains an open question. The impact of those possible developments on growth, interest rates and inflation must also be factored into the outlook. For the time being we maintain our cautiously optimistic stance.
About the Sanibel Captiva Trust Company
The Sanibel Captiva Trust Company is an independent trust company with $1.8 billion in assets under management that provides family office and wealth management services, including investment management, trust administration and financial counsel to high net worth individuals, families, businesses, foundations and endowments. Founded in 2001 as a state-chartered independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. Each portfolio is separately managed and customized specifically to the client’s yield and cash-flow requirements. The Naples Trust Company and The Tampa Bay Trust Company are divisions of The Sanibel Captiva Trust Company. Offices in Sanibel-Captiva, Naples and Marco Island, Tampa, Belleair and Winter Haven. www.sancaptrustco.com