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THE BOTTOM LINE: Tax reform, expensive tech stocks, and the Fed's massive balance sheet unwind

Business Insider | Dec 8, 2017, 01.17AM IST

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This week:

  • Business Insider executive editor Sara Silverstein talks about the effect of tax reform on economy. She cites a recent Goldman Sachs report, which says the benefit for corporations will be small, and that the effective corporate tax rate will only drop by a few percentage points. Silverstein also conveys Goldman's point about how tech stocks may see less of a positive impact than previously expected.
  • Silverstein sits down with Lori Heinel, the deputy global chief investment officer at State Street Global Advisors. Heinel says that 2018 could be another strong year for equities, citing a synchronized global recovery that hasn't been seen since 1988, which she says will drive corporate earnings growth. She discusses valuations, saying that stocks are only particularly expensive in the US, while Japan and emerging markets are more attractive. Heinel touches on tech stocks, which she says have been a huge beneficiary of the so-called momentum trade. She says the sector is still attractive, but only on a selective basis, citing semiconductors as an area of interest.
  • Heinel says that she's not particularly worried about the Fed or Fed policy. She says that while global central bankers have tightened monetary conditions slightly, they've done so gradually, and with a great deal of signaling. Heinel does say, however, that a sudden increase in inflation could derail markets, because of how the Fed would have to react, as well as the effect on corporations. Ultimately, she thinks that as long as inflation expectations stay contained, there won't be too much of a problem. Outside of equities, Heinel says that investors should keep positions in bonds. She recommends high-yield over high-quality and sovereign bonds, because it represents a better risk-reward.
  • Silverstein asks Heinel about the lack of volatility right now, and she attributes that at least partially to the great deal of central bank accommodation going on worldwide. Heinel does note that the markets are signaling that there are concerns around the margins, citing an index of market risk that's showing a good deal of tail risk. She says you could see some sort of macro or geopolitical event happen that could derail markets in the short term, but says that could represent a buying opportunity.
  • Heinel says that State Street is constructive on China right now, citing political stability. She notes that a great deal of incremental global growth is coming from there. In terms of investment opportunities, she says the situation in China provides additional support for equities around the world, and also gives people the opportunity to look at China-specific corporations.
  • In the Fidelity Insight of the week, Silverstein speaks to Ford O'Neil, a fixed-income fund manager at the firm. He says that the markets and the Fed are in agreement for this year, but have diverging outlooks for 2018, with the Fed signaling more rate hikes than the market expects. O'Neil says he sides with the Fed, citing synchronous global growth that could boost inflation. He says that there will be more pressure on the front end of the yield curve if there are three hikes. In particular, O'Neil thinks that there will be wage pressures next year as unemployment falls below 4%, which will push inflation higher.
  • O'Neil says that as the Fed prepares to unwind its massive balance sheet, there will be pressure on both interest rates and mortgage spreads. In terms of the stocks versus bonds debate, he notes that the equity market is embracing President Trump's pro-business agenda, while bonds are more mixed. O'Neil then says that low rates in Europe and Asia are driving overseas demand for US rates. Lastly, he says that corporate credit spreads are priced to perfection, and predicts that they'll be wider in a year.
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