The Journey Ahead
In our prior outlook we noted that market expectations with respect to tax and healthcare reform, infrastructure spending and general deregulation efforts (energy and banking) would spur the market to higher valuations during the first half of the year. We also suggested that the implicit step up in earnings growth acceleration assuming those changes actually occur were essentially already being reflected in current valuation and that by mid-summer 2017,the market would be at risk of a small correction.
The current ambiguity concerning the political will of Congress to develop a viable plan regarding healthcare, the delay of tax reform and the prospect of a significant global conflict occurring have only increase the probability that there may be a re prioritizing of the President’s objectives which will at the very least push out some of the anticipated financial benefits to the market. We believe the market is already beginning to temper those expectations. According to Morningstar, while we are still in the overvalued range though investors are already experiencing some of the deflation of its robust expectations.
We do believe any decline would be arrested by some continuing positives including US job growth, non-domestic economic growth supporting our export economy and still low interest rates. Real estate, healthcare companies, financials and consumer cyclicals are all sectors which remain relatively attractive and can benefit from steady economic growth and a more laissez faire regulatory backdrop from a secular basis. Consumer durables, utilities, energy, industrials and technology appear over valued from a sector viewpoint. Keel will continue to take advantage of any modest revaluation downward to add stock issues in the above sectors during the next six months. The investment community will have to be particularly sensitive to the intersection of timing, political winds and specific valuation shifts during the next quarter given what we believe is a period of heightened market uncertainty. The market tends to account for uncertainty by discounting asset prices.