In our 12/19/2016 Weekly View, we indicated that we were assessing our tactical position as we felt sentiment was approaching optimistic extremes.  Last week, we made a tactical decision to reduce US Stocks in our balanced portfolios.  Going into the end of 2016, our balanced portfolios had more equity exposure in order to take advantage of the post-election rally in the US.  Below is a summary of our current positioning as a result of the most recent portfolio changes:

1. As we begin 2017, it is our belief that the post-election rally may have gotten ahead of the new administration’s policy implementation.  We remain optimistic about the prospects for US stocks as a result of expected policy changes from the new administration and Congress.  However, our measures of investor sentiment suggest that our optimism is now widely shared.  In the first quarter, the details of policy will become more apparent, as will any differences among policymakers.  This process may be more challenging than anticipated.  

David Fuller's view

We have a global stock market rally sparked by Trump’s election.  As we approach the first half of January, stock market performances in the first two weeks of January 2017 could not be more different than what we saw in early 2016.  Seasonal factors are favourable, although this made no difference last year. Nevertheless, on average they have worked more often than not, which is why this time of year is known for its favourable seasonal factors. 

Perhaps more importantly, animal spirits in favour of stock markets have returned for the first time in a long while.  Most of the hedge shorts have probably been covered but I doubt that most long-only investors are fully invested. 

Against this background I would not be too quick to exit the US and other stock markets.  I maintain that the 35-year bull market in US 10-Year Treasuries ended in July, but a yield below 2.6% (the level recently publicised by Bill Gross) is helping rather than hurting stocks.  Bond yields may not start to become a headwind for equities until they are rising above 3%.  The risk of a stock market correction is likely to increase beyond April but I would back relative strength in the current environment. 

It may be tempting to buy stocks which are cheaper, on average, than on Wall Street but Trump’s policies for boosting the US economy are grabbing most of the important headlines.  More significantly, no other economy is likely to receive the same near-term stimulus. 

Here is a PDF of The Weekly View. 

(See also: Trump may boost global economy, by John Kehoe of the Financial Review)