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Fading Trumponomics Optimism Gives Way to Global Growth

Fund Manager Updates
  • Sentiment has cooled The reflation narrative that has fueled markets for much of the last six months has begun to sputter of late. So what’s changed? In a word, sentiment. Markets were largely carried aloft by the promise of pro-growth policies from a Republican president, rubberstamped by a GOP Congress. But reality has proved quite different, with the administration spending vast quantities of political capital on reforming health care policy, but so far proving incapable of unifying a fractious Republican caucus in the House of Representatives. Market-friendly policies like tax reform and infrastructure programs have been left to languish, potentially delaying any fiscal impact into late 2017 or, more likely, 2018.
  • Expectations coming back to earth In recent weeks, economic sentiment has begun to erode and markets have been quick to react. Exhibit 1 shows the Citi US Economic Surprise Index, which measures data surprises relative to market expectations. As investors have become more upbeat, it’s become harder to beat elevated expectations. This has resulted in an erosion in sentiment and a modest bout of market turbulence in recent weeks. This, in turn, has set off a vigorous debate on the relative importance of “hard” economic data, like industrial production, retail sales and employment growth, versus “soft” data, like business confidence, consumer sentiment and purchasing managers’ indices. Hard data measures things you can count; soft data measures how people feel. And history shows that sentiment doesn’t always translate into economic outcomes.


  • Valuations don’t reflect shifting sentiment Reflationary sentiment has eroded in recent weeks as sky-high expectations for rapid implementation of pro-growth policies by the Trump administration have cooled, but market pricing has barely corrected, keeping equity valuations at historically high levels. Perhaps markets are being held aloft by dwindling fears that the US Federal Reserve might react to a front-loaded Trumponomics fiscal program by taking away the punchbowl, while a smaller, later-arriving program could allow the Fed to raise rates more gradually, potentially elongating the aging business cycle. Perversely, legislative success could ultimately prove counterproductive for the Trump administration, since the Fed might feel the need to offset fiscal loosening with monetary tightening in order to forestall inflation.


  • Follow the leaders While we’ve experienced a synchronized growth upturn since mid-2016, the United States has been a relative growth laggard. China, Japan, the eurozone and the United Kingdom have reported more robust industrial production and trade data during this stretch, though inflation measures in the US have risen more than those overseas. We seem to be nearing an inflection point where the market will have to determine whether the global economy is strong enough to maintain the reflation narrative absent the expected boost from Trumponomics.


  • US not in danger of rolling over, but… Expectations likely got ahead of themselves in the wake of the US presidential election. Many had hoped that the US economy was ready to shift into a higher growth gear after being stuck near 2% growth for the better part of the last eight years. But market optimism, once it fades, often turns to despair. Where does this leave us? While the economic backdrop remains relatively benign — not so hot as to warrant faster monetary tightening from the Fed, but not so cool as to raise fears of impending recession — full valuations remain a concern, offering investors little cushion should market sentiment erode more deeply. While it doesn’t appear as though the US or the global economy is poised for a rapid-growth breakout, neither appears poised to slip into a slower-growth trajectory. Two-percent US growth has not boosted personal incomes considerably, but it has been very supportive of asset prices, and that doesn’t appear likely to end anytime soon. In our view, global growth remains comfortably in the middle-to-upper end of its recent growth range. Additionally, China is performing better than expected in early 2017, with both monetary and fiscal stimulus exceeding expectations, supporting economic growth and global trade.
  • Known unknowns are behind us With the Dutch elections and the first round of presidential voting in France behind us, fears of a populist wave crashing across Europe have dramatically receded. While Italy’s high debt levels and weak banking system remain major concerns, investors have historically been more negatively impacted by unforeseen risks than well-documented ones, given that the market acts as a discounting mechanism.
  • Bottom line The reflation trade and Trumponomics are related but not synonymous. Continued — and somewhat unexpected — stimulus from China is helping support global industrial production and trade at a time when US fiscal stimulus might be later in arriving than earlier expected. This supports the notion of continued steady, but unspectacular, global growth, continued low inflation and relatively benign conditions for risky assets such as equities and high-yield bonds.

The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.

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