Time Going By

May 2, 2017

A great hullabaloo was made as the 100th day of the Trump presidency approached, and now that it has passed, we’re left to wonder what that arbitrary milestone really signified. Perhaps a more significant milestone is six days away, namely that a half-year will then have elapsed since the 45th president of the United States got elected. From an investor standpoint, the political cycle more truly encapsulates the four years between elections days rather than from one inaugural to the next. And a half year, representing one-eighth of the whole cycle, is a more meaningful chunk of change to assess than a mere 100 days.

What there’s been most during the last six months has been a ton of official pronouncements. It’s been hard following the bouncing ball. The action oftentimes has been combative, full of sound and fury but seemingly signifying far less with the notable exception of the expeditious nomination and confirmation of a ninth justice to the Supreme Court. Investors are still waiting for the beef on such matters as fiscal spending changes, tax reform, financial market deregulation, wall building, immigration reform, the defeat of ISIS, etcetera, etcetera.

The U.S. economy did not snap to attention as soon as Trump was sworn in even though he promised he would reinvigorate growth to 4% or more. The rate of GDP expansion was nearly halved to 2.1% in the fourth quarter from 3.5% last summer and decelerated by a further third to just 0.7% in the first quarter of the Trump stewardship. That was the weakest positive pace in a string of up quarters dating back to the spring of 2014. Real personal consumption, which tends to rise even during mild recessions, slowed to just 0.3% annualized last quarter despite sharply improved survey measures of consumer confidence. Industrial production began 2017 with a net 0.2% decline in January-February before tacking on a 0.5% gain in March. But retail sales recorded back-to-back drops of 0.3% in February and 0.2% in March.

The good news is that core inflation, although rising, hasn’t leaped way ahead of the Fed’s curve. Price pressure is doing exactly what monetary officials desire, and that means the Fed can operate in a sweet spot, normalizing policy at such a gradual pace that the risks of excessive advances in long-term U.S. interest rates and the dollar are held in check. The healthier-looking economies in Europe, Asia and a number of emerging markets also has kept dollar strength somewhat contained. There’s been relief, too, that France does not appear likely to elect a far-right president.

Since the close on November 8 when Trump beat Clinton and stunned the world, the dollar has risen only 1.0% on balance against the euro and fallen about 5% against the Mexican peso, which previously had been the most sensitive market barometer of shifting expectations on the likelihood of a Trump victory. A bigger 6.6% appreciation has occurred against the yen, but the trade-weighted dollar rise against a cocktail of other widely traded currencies has been merely 2%. The ten-year Treasury yield has on net advanced 45 basis points; however, such remains historically low at 2.31%.

U.S. equities have outperformed expectations, with double-digit gains of the Dow, S&P 500 and Nasdaq. Stocks, which one expects to ultimately track corporate earnings, have benefited from increasingly unequal wealth and income distribution in the United States. Ordinarily, the relative shares of GDP allocated to wages and entrepreneurial profits should be more or less stable over the long run. In a state where trend GDP growth is historically low, a prolonged bull market in equities doesn’t seem sustainable. Such logic led people, including former Fed Chairman in 1996 when the DOW was in the 6000s, to wonder if the market had entered a period of irrational exuberance. But it’s not irrational if the slice of wages from the GDP pie keeps shrinking at the expense of profits, and that’s what happened and continues to do so.

Investors may worry that stock market valuations are way too high, but such thinking for now can be counterbalanced by the confidence that a business-friendly government in Washington is not about to take any actions to jeopardize income inequality. As the world learned in 2007, politicians do not have the power to prevent economic calamities, which can be ignited by endogenous ruptures in market-driven dynamics or exogenous shocks driven by bad domestic economic policies or ill-fated foreign policies.

We’re in a period where things may look okay for now in spite of the ever-present undercurrent of fear. Markets are reasonably stable, yet it might and can all go awry in a heartbeat.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


Comments are closed.