| What a tumultuous year 2016 has been. Just around this time last year, we were looking back at 2015 and analyzing how 2016 would unfold. The August 24-25, 2015 “Flash Crash” was the talk of the day, where the S&P 500 faltered with an over 10% decline from its all-time highs. It was the first time in over 4 years that the noble index fell from grace so badly; and January and February 2016 brought more pain for the index.
Back in 2016, China’s unknown growth drivers, Brexit, the faltering price of oil, tighter financial conditions, a looming initial interest rate hike by the U.S Fed, declining corporate earnings and the soaring U.S dollar were the focus of the financial media.
As we enter 2017, what’s changed? What can we expect in the coming year?
HALF EMPTY – HALF FULL
The biggest single stress point for global economies, and the U.S in particular, seems to be coming from the fallout of the U.S elections. The potential of a Trump victory, the euphoria of it materializing, and the skepticism (because of lack of policy clarity) of what Mr. Trump can and will deliver, are sending mixed signals across global markets.
In many ways, 2017 appears to be setting itself up as a perfect case of “half-empty, half-full” year. Those harbouring bullish sentiments about the economic activity globally and especially of the U.S economy, point to the plethora of rosy economic indicators that have been hitting the newswires of late:
- Corporate earnings look to beat: As of Jan 23rd 2017, 74% and 47% (of the 12% that reported until then) of S&P 500 members have
beat estimates for Mean EPS and Mean Sales.
- The Consumer Price Index (CPI) saw its fastest rise in 5 years, jumping by 0.3% in December.
- Industrial production rose 0.8% in December – it’s strongest gain in 2 years.
- Information Tech, Mid-Cap, Consumer Discretionary and Growth-oriented equity prices had posted gains during the month of January.
If all of this infuses the reader with confidence that the coming months will spell an end to all the economic woes facing us over the past few years – think again! The bears are not to be outdone, and 2017 has its detractors too:
- January 2017 has seen Value, Small-Cap and Energy stocks lag their peers in other equity groups.
- “Trumponomics” seems to add confusion and chaos across the globe, with Barrons’ recession model flagging “…a 40% chance of a U.S. recession” as we head into 2017
- As of Dec 30, 2016, stock market valuations for many countries, including the US, UK, New Zealand, India, Denmark, Ireland seem to be in the red (over valuation territory)
With the new Trump administration determined to follow-through on its “Make America Great Again” and “America First” pledges, detractors warn that the “Trump Trade” may be over, and that markets are heading for a correction.
EARLY SIGNS
Perhaps the clearest signs of the Trump-gyrations that 2017 will bring to investors can be spotted in the wild fluctuations of the DXY US Dollar Currency Index (IRDXY0:IUS) . A day before Mr. Trumps stunning win (Nov 8), the index closed at 97.85. Victory day (Nov 9) saw it inch slightly higher – 98.50. Since the new administration took over, the IRDXY has moved in a range from 98 to 101.
While a stronger U.S dollar may be good for importers, it does not bode well for companies doing most of their business outside the US. With little to no clarity about Mr. Trump’s “REAL” trade agenda in sight, expect this volatility to continue. Any continued gain in the U.S dollar would impact non-US assets, both debt and equity, negatively.
President Trump, in concert with a republican-held congress will likely pass many pro-growth policies (or Executive orders); but that will raise the spectre of over borrowing, excessive spending and general care freeness – which will lead to recessionary conditions.
With Trump’s pro-growth policies will likely come job growth, wage growth and tightening of the labor market. This will inspire confidence for the Fed to raise interest rates more than twice in 2017 – which could sow the seeds of inflation.
Protectionist Trump foreign trade policies, and isolationist foreign relations policies will likely spell trouble – not just for global economies, but specifically for the U.S.
Finally, if the new administration falters in the (or delays) delivery of its promised infrastructure spending, corporate tax rate cuts and other fiscal spending, then markets could be headed for a huge downside surprise.
Time will tell whether 2017 will be the year of the Trump Bump, or a Trump Dump!
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