NIRI Boston 2016-2017 Kickoff: The State of the Economy & Markets

In September, the Boston chapter of NIRI held an event to discuss, “The State of the Economy & Markets.”

Up to 85% of a stock price’s move is driven by macroeconomic factors and have nothing to do with that particular company, said Tony Dwyer, Senior Managing Director and Chief Market Strategist at Canaccord Genuity, as he opened his “The State of the Economy and Markets” talk during the NIRI Boston 2016-2017 Kickoff Event.

Brexit’s impact has been fleeting thus far, with the markets quickly recovering after a two-day crisis. The outlook for the election is similar. No matter who wins in November, be prepared for your stock to feel the impact. The good news, says Dwyer, is that the markets have historically recovered very quickly post election.

Canaccord’s outlook on the markets all remain constructive:

  • The equity market is most closely correlated to the direction of earnings, which ended 2015 slightly negative due to the Energy sector.
  • The direction of earnings is driven by economic activity, which remains in an uptrend, albeit a modest one due to the pronounced weakness in the commodity space and uncertainty following Brexit;
  • Positive economic activity has been driven by the steepness of the yield curve and availability of money — both of which remain pro-growth;
  • The steepness of the yield curve and availability of credit is driven by Fed policy, which should remain extremely accommodating;
  • Fed policy is driven by core inflation, which should remain historically low.  This gives the Fed time to remain patient as it relates to rate hikes.

Dwyer explained the inflation outlook is still historically low and stable. He said the recent commentary from the Fed Chair coupled with market expectations should allow for a negative Real Fed Funds rate through 2016.  Only levels higher than 2% have warranted fear of recession.

Canaccord’s view is that stable inflation and low rates will drive a positive economic backdrop for the foreseeable future.

  • GDP should remain positive despite macro issues.
  • The “Millennials” demographic will push an upward trend in household formation
  • Home ownership and vacancy rates remain near multiyear lows
  • Employment trends are enabling banks to generate loans, household debt service ratios are allowing the servicing of debt, and banks are willing to make real estate loans
  • The ISM Manufacturing Index and Industrial Production have shown signs of stabilization, especially in New Orders Index
  • ISM Services continues to suggest growth, albeit at a slower pace
  • Global growth is slow, but it may not be as bad as some perceive

Many thanks to Dora Gonzalez-Rodriguez, Associate at Sharon Merrill, for writing our September event summary.