Monday Morning Minute 111416
THE WEEK AHEAD
While light on details, the Trump economic vision is capturing the market’s attention. The sweep by Republicans came as a shock to markets, and President-elect Trump’s acceptance speech highlighted spending and tax cut initiatives that are welcomed as “pro-growth.” There is much still that needs to be worked out, and the devil is always in the details.
If campaign promises are enacted as stated, sweeping changes to trade, taxes, government spending, and regulation are all on the table. Most proposals on spending, taxation, and regulation are likely to add a boost to 2017-2018 growth. Lighter taxation of capital and less regulation should also support faster capital formation, investment, and growth. A government-led infrastructure program, alongside tax cuts, should also provide a boost to growth in output, investment, and profits, all else equal.
As for monetary policy, there is little near-term change in expectations for a December rate hike from the Federal Reserve (Fed). After his inauguration, then President Trump is expected to nominate two new Fed governors to fill vacant seats at the Fed’s Board of Governors. These appointments will be evaluated against candidate Trump’s assertions that the Fed was keeping rates “artificially low” in the run-up to the election. Within a year of the inauguration, then President Trump will also be required to decide on who leads the Fed after Janet Yellen’s term expires in early 2018. Although most of the existing board members are dovish-leaning and will remain seated through 2017, the composition and policy direction for the Fed beyond 2017 has suddenly become far less certain.
The thorny issue of trade also looms large on the horizon. Trade with China was front and center with Donald Trump in addressing the electing public during his campaign. Withdrawing from the trans-pacific partnership (TPP), getting “tough” on trade negotiations, renegotiating the North American Free Trade Agreement (NAFTA), and “labeling China a currency manipulator” are all elements of the candidate’s trade platform. Whether a President Trump actually follows through with any of this is yet to be seen, and the ultimate impact of any of it is unclear. If enacted in full, president-elect Trump’s trade posture appears to be a net risk factor for near-term global growth.
We are taking all of this with a grain of salt, however. There is a wide gap between campaign trail promises and deliverables once in office. Even though both houses of Congress are now held by Republican majorities, there remains limits to just how much of an agenda one administration can reasonably execute. A system of checks and balances, alongside long-standing institutions, was designed to limit power, and political divisions remain within the Republican party itself. Moreover, a sense of unease exists regarding the United States’ high levels of government debt and its growth trajectory in recent years. Therefore, we are skeptical that President-elect Trump’s economic and fiscal policies are enacted in their entirety.
We are maintaining an underweight position in long-term Treasuries and an overweight position in U.S. equities. This position was adopted immediately following Brexit lows on plunging 10-year Treasury yields, while U.S. fundamentals conditions appeared to be improving for equities. As the dust clears from last week’s surprising election outcome, we will re-evaluate our capital market assumptions and adjust exposure as necessary.
ECONOMIC RELEASES THIS WEEK
|Monday, November 14:||No Economic Data Releases|
|Tuesday, November 15:||Retail Sales M/M||October||0.6%||0.6%|
|Retail Sales Ex Auto M/M||October||0.5%||0.5%|
|Retail Sales Ex Auto and Gas M/M||October||0.3%||0.3%|
|Empire State Manf Survey||November||-4.0||-6.8|
|Import Price Index M/M||October||0.3%||0.1%|
|Import Price Index Y/Y||October||-0.5%||-1.1%|
|Wednesday, November 16:||PPI Final Demand M/M||October||0.3%||0.3%|
|PPI Ex Food and Energy M/M||October||0.2%||0.2%|
|PPI Ex Food, Energy, Trade M/M||October||0.2%||0.3%|
|PPI Final Demand Y/Y||October||1.2%||0.7%|
|PPI Ex Food and Energy Y/Y||October||1.6%||1.2%|
|PPI Ex Food, Energy and Trade Y/Y||October||—||1.5%|
|Industrial Production M/M||October||0.2%||0.1%|
|NAHB Housing Market Index||November||63||63|
|Foreign Demand for Long-Term U.S. Securities||September||—||$48.3 B|
|Thursday, November 17:||Weekly Jobless Claims||November 12||—||254 K|
|CPI Ex Food and Energy M/M||October||0.2%||0.1%|
|CPI Ex Food and Energy Y/Y||October||2.2%||2.2%|
|Housing Starts M/M||October||11.2%||-9.0%|
|Building Permits M/M||October||-2.5%||6.3%|
|Philadelphia Fed Business Outlook||November||8.0||9.7|
|Friday, November 18:||Leading Indicators||October||0.1%||0.2%|
ASSET ALLOCATION PORTFOLIO POSTURE
Based on our long-run capital market expectations, the “core” equity allocation in portfolios are underweight foreign equities / overweight large cap domestic growth, and underweight REITs / overweight Gold. The “core” bond allocation is underweight long-term Treasuries / overweight corporate high-yield bonds.
Based on shorter-term expectations, the “tactical” allocation within portfolios is underweight bonds / overweight stocks.
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.
Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher quality bonds. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
The WCA Fundamental Conditions Barometer measures the breadth of changes to a wide variety of fundamental data. The barometer measures the proportion of indicators under review that are moving up or down together. A barometer reading above 50 generally indicates a more bullish environment for the economy and equities, and a lower reading implies the opposite. Quantifying changes this way helps us incorporate new facts into our near-term outlook in an objective and unbiased way. More information on the barometer is found in our latest quarterly report, available at www.washingtoncrossingadvisors.com/insights.html.
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Kevin Caron, Portfolio Manager Chad Morganlander, Portfolio Manager Matthew Battipaglia, Analyst
Suzanne Ashley, Junior Analyst