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Editor’s note: Tony Dwyer, U.S. portfolio strategist for Canaccord Genuity, and his colleagues author a widely respected monthly overview of market conditions, technical factors, and future market outlook called the “Strategy Picture Book.” The following provides an excerpt from their May 10, 2017, report on the short-term market outlook.

Did the Trump administration awaken the enthusiasm and confidence among small businesses, households, and CEOs? All three measures of animal spirits in the markets rose sharply to a cycle high following the November election and have not given up any ground. This resilience comes despite the volatility around repealing Obamacare and introducing tax legislation. The fact that confidence remains historically high for businesses and households likely has more to do with expectations for no new anti-business regulation and taxes than legislation making it wildly better.

Our recent market upgrade was more about becoming offensively positioned vs. expecting a big near-term market ramp

Some have suggested that disappointment in the Trump agenda could have a negative market impact, but we would argue the pro-Trump sectors have already been beaten down versus the anti-Trump sectors (Figure 1). In fact, they have given back all the post-election gains relative to the anti-Trump sectors despite (1) a solid domestic and global economic outlook, (2) still-accommodative Fed policy as seen through the positive-sloped yield curve, (3) the demographic tailwind of millennials that should drive housing, and (4) continued earnings-per-share (EPS) recovery that could ramp up if any of the proposed tax cuts occur.

FIGURE 1: ‘TRUMP TRADE’ GIVING BACK GAINS

We remain focused on intermediate-term potential and recently adopted a more offensive position

While our key tactical indicators have not reached a level that typically pulls us off the sidelines, the combination of several factors causes us to turn our attention to the intermediate-term opportunity rather than the near-term risk:

1. Our positive fundamental core thesis remains in place regarding factors such as inflation, interest rates, economic growth, a positive EPS trend, and valuations.
2. The synchronized global recovery and improvement in the domestic economic data and EPS.
3. The generally positive market history following long-duration, low-volatility periods.
4. Increased probability of corporate tax cuts.

We believe our SPX 2017 and 2018 targets of 2,470 and 2,720, respectively, may prove to be conservative. We would add to positions in the Financial and Industrial sectors, and begin stepping into Energy and Materials sectors, on further weakness.

We expect several continued macro-economic tailwinds will help in keeping animal spirits in the markets alive: (1) historic global monetary accommodation, (2) improving commodities and stable emerging currencies, (3) positive trending U.S. economic growth, and (4) an acceleration in the global economy. Only a real Fed Funds rate above 2%, an inversion of the U.S. Treasury yield curve, and significant stress in the Chicago Fed National Financial Conditions Index would command a long-term change in our positive economic view.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

Tony Dwyer joined Canaccord Genuity in March 2012 as the firm's U.S. equity market strategist and a senior managing director. In 2015, Mr. Dwyer was named co-director of research, and currently sits on the firm’s operating committee. Prior to joining Canaccord Genuity, he served as equity strategist at Collins Stewart, and also held the additional role of director of research while sitting on the firm's executive committee. Mr. Dwyer started his career at Prudential-Bache Securities in 1987 as an equity market strategist. canaccordgenuity.com