By Adam Schor, CFA
Our risk measures and our company meetings are reflecting a change in attitudes. At the market level, we have noted that risk factors are diminishing in importance, especially volatility and yield, which were unusually important in previous quarters. We've also noted that correlations between stocks within indices are near three-year lows, again supporting the notion that stock picking rather than macro fears will drive results.
We think Donald Trump's election, with his pro-business stance, and the beginning of a series of rate increases marks the start of a shift from a financially fueled economy to one fueled through business investment. Business spending has been a missing component of the recovery. Companies will begin to invest more in real assets, either property plant and equipment (PPE) or mergers & acquisitions (M&A), and perhaps spend less on dividends and share repurchases. That spending trend, which we are hearing about in our company meetings, will shift the focus from the macro to the company level. I noted that Federal Reserve Chairwoman Janet Yellen in February's Congressional testimony talked about an improving business sentiment in the last few months. The promise of lower taxes and less regulation - plus a more stable world economic situation - helps.
Yet, it doesn't mean that macro is no longer a worry. Mr. Trump is unpredictable, and there is risk that his policy promises will go unfulfilled. European elections and Brexit negotiations linger. We think, however, markets are better equipped to handle the macro uncertainty in the backdrop of growth and renewed business confidence. It is a change from a year ago, as economic uncertainty and looming elections reflected in oil prices (and around China), driving investors to defensive stances and away from a focus on fundamentals. Macro events are not going away, but we think their influence on investors is diminishing as corporate activity increases. We believe the markets' increasingly calm reactions to political events as 2016 progressed shows the start of this trend.
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