We have been discussing for weeks on end how there has been a mindset shift leading towards fiscal stimulation on top of global monetary ease that would lead to accelerating global economic growth, higher inflation, a steepening in the yield curve, and much higher profitability.

Accordingly, I've recommended that you reposition your asset allocation and investment selection by selling the old winners, buying the past losers and owning no bonds whatsoever. While patience is needed to let this strategy unfold, the die has been cast. Bet on reflation!

Look at the data points that came out last week supporting this view:

  • India lowered rates
  • China announced new plans to stimulate domestic consumption
  • Chinese inflation turned up
  • France and Italy are moving toward more fiscal stimulation even though it may break the deficit pact, but political risks and the rise in populism are outweighing budgetary concerns and fear of Germany's retaliation
  • Both U.S Presidential candidates have announced that multi-hundred billion infrastructure spending programs will be their first priority and
  • Saudi Arabia wants to keep the price of oil up so that they can issue debt and bring Aramco public.

And finally there was Janet Yellen's speech in Boston on Friday which basically said that the benefits of a "High Pressure Economy" are substantial. This means that the Fed will be reticent raising rates; will stay behind the curve and let the economy run and, with it, economic growth and inflation. This does not mean that the Fed won't raise rates. It will. Rather it will be slow and one step behind, risking an overheating economy and much higher inflation.

Investors have to stop looking in the rear view mirror in order to drive forward. The way to move ahead is to look through the windshield towards the desired destination and plan the trip accordingly. 

Future-focused investing means investors have to review corporate strategies to see who is best positioned and are most leveraged for an accelerating economy. Look for quality companies that can weather any environment with dividend yield above the 10-year treasury as it provides downside protection.

I wrote last week that Honeywell was unfairly hit after it slightly lowered its top end guidance for 2016. Management was shocked by the stock market reaction and hence, decided to come out with another SEC filing discussing the company's prospects more fully for the rest of 2016, 2017 and beyond. The market rebounded 5% and there is much more to come.

I suggest you look at Alcoa which came out with disappointing third quarter results. The company is in the process of splitting into two separate public companies: a value added one, Arconic, similar to a company that Warren Buffett purchased at over 30 times earnings and the old line Alcoa, a low cost aluminum company. It is my opinion that management took all the costs in for the split and set the bar low for 2017 and beyond which are really quite favorable. Managements for both new entities, who are excellent, begin a road show to give investors a clearer picture for 2017 and beyond. I believe that the combined entities have 30+% upside over the next year.

Let's look at the financial sector.
I have written over the last year that companies in this sector were a win/win as managements have aggressively changed the business mix to be very profitable even when interest rates were low and the yield curve relatively flat. I said they would become even more profitable once the yield curve steepens which is occurring now!  My favorites have included BAC, C and JPM amongst others. If you have the time, look at both JPM's and C's excellent earnings reports that came out last Friday. Both sell at approximately 10 times earnings. Financials are roughly 18% of our portfolio. The best is yet to come as the global economies accelerate and the yield curve continues to steepen.

Let's wrap this up.
It is clear that fiscal stimulus is on the horizon and global economic growth will accelerate as we move through 2017 into 2018. Expect monetary authorities to stay one step behind and for the yield curves to steepen. Corporate profitability will be surprisingly strong as the benefits of shifts in business mix and reduction in costs will be realized as volume and pricing improves. Inflation will increase probably above the 2% mark but will stay contained due to the competitive impacts from globalization and the disrupters. Buy the companies leveraged for economic growth and sell past winners such as consumer nondurables, drugs, REITs, and utilities, etc.

Remember that this is a market of stocks and PROPER selection during this transition period will lead to significant outperformance over the next two years. We will monitor the data points in this blog week to week testing our new investment thesis. So far, so good!

So review all the facts; pause, reflect and consider mindset shifts; consider the proper asset allocation and risk controls; finally do independent research on each investment; and...

Invest Accordingly!

William A. Ehrman is managing partner at Paix et Prosperite LLC.