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Brexit, Germany, China: How the Global Economy Could Fare in the New Year

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NATHAN PETERSON: Hello, and welcome to the December 7 Schwab Market Snapshot. I’m Nathan Peterson sitting in for Randy Frederick. Today, I’m joined by Jeffrey Kleintop, Schwab’s chief global investment strategist, to talk about what we learned from 2016, as it relates to the markets, and what we have to look forward to as we go into 2017. Welcome, Jeff.

JEFF KLEINTOP: Hi, Nate.

NATHAN: So, Jeff, 2016 was an eventful year, and there were certainly some interesting developments on the political front. What stands out to you as you look back on the year?

JEFF: Yeah. Well, you know, it was this wave—this global wave—of populist outcomes for these votes. Whether it was Brexit, or Trump or the Italian referendum this past weekend, it would be easy to extrapolate that kind of anti-establishment trend of vote outcomes to 2017. After all, many of those elections—we’ve got one in France in May and in Germany later in the year—they feature, or are likely to feature, anti-establishment candidates who could usher in a movement to leave the EU, which would cause a financial crisis. And I think it would be wrong, however, to just extrapolate that outcome. And one of the main reasons is the elections are very different next year.

If you take a look at Germany, for example, Chancellor Angela Merkel’s party leads the anti-establishment opposition by a 20-point margin—so it’s really not close. And so, you know, I don’t—you know, we know not to trust polls, right? We definitely learned that about 2016. But we’re not talking about two or three points, we’re talking about 20. So it doesn’t look like the outcomes are going to be the same in France and Germany—these outlier populist anti-establishment outcomes.

But it doesn’t mean the market isn’t going to react in a similar way, right? It may sell off ahead of those elections, or votes, only to then respond and rally once we got the election outcomes, following the same pattern we saw in 2016. But that could mean rough sledding for the next six to nine months in Europe as we head into those elections, even if, ultimately, the outcomes remain in the somewhat more established vein.

NATHAN: So perhaps some volatility may be encountered around those elections dates for European stocks. What else stands out to you in 2016? How should investors interpret the current global economic climate?

JEFF: It’s very different than it was going into 2016. Then, the world economy was slowing down. Leading indicators were slowing and indeed, the economy did globally slow down a good bit in the first half of 2016—but it turned around and picked up in the second half. We can see that in leading indicators, in manufacturing, many areas. And, in fact, we’re increasing—we’re getting better, accelerating momentum as we head into 2017—very different than a year ago.

In fact, since the election in the U.S., one of the big economic forecasting groups, the Organization for Economic Cooperation and Development, the OECD, recently went full Oprah and upgraded all the major regions: “You get an upgrade! You get an upgrade! You get an upgrade!” everywhere—the U.S., Europe and Japan, as well. So we’ve got increasing economic momentum we didn’t have a year ago, and that could be good news for profits and help to lift stocks in 2017.

NATHAN: OK, you mentioned Europe and the U.S., but investors typically have questions about China. How do you think they fared this past year, and then what should we look forward to as we go into 2017?

JEFF: Well, like the rest of the global economy, China was slowing a year ago, and there were a lot of concerns. They had just devalued their currency. Their stock market had blown up in late 2015. So there were worries heading into ’16. But, you know, their economy stabilized a little bit, but thanks only really to government intervention. The government put forth a huge infrastructure stimulus program. They spent over a trillion dollars on infrastructure this year to try and shore up economic growth. It worked, but it might slow next year. They might not continue that same pace of infrastructure growth.

We’ve talked in this country about a trillion dollars over 10 years. China did more than that just this year. If they slow down, the rally we’ve seen in infrastructure stocks, in the materials and industrial sector, may suffer a little bit based on that Chinese pullback, even though we might do a bit more than we’ve done in the past. So that’s also something to watch out for 2017. China’s growth stable, but watch out for the industrials and materials sectors that have benefited recently in the rally.

NATHAN: Great perspective, as always. Thanks so much for joining us today, Jeff.

If you have questions and want to read more from Jeff, you can do so by going to the Investing Insights section on Schwab.com. You can also follow him on Twitter @JeffreyKleintop.

We’ll be back next week. Until next time, invest wisely. Own your tomorrow.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, business, and other conditions.

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