The Lowdown on Markets to 20th January 2017
World Markets at a Glance
In this week’s issue
- “America First” was the pledge given by President Trump in his inaugural speech.
- President Trump’s proposed policies will now try and re-shape the US and its economy.
- Market watchers and the media will now focus on the Presidents first 100 days in office.
- Prime Minister, Theresa May, will now have frank discussions with the new President.
- Unquestionably, the markets have reacted positively post the presidential election.
- The overall outlook remains quite positive as the global economy continues to recover.
“Donald Trump is sworn in as the 45th President of the United States of America”
“America First” that was the pledge given by President Donald J Trump in his inaugural speech as he was sworn in as the 45th President of the United States of America. In that speech he revisited many of those issues that he based his presidential campaigned upon, populism, protectionism, and anti-establishment themes. In a defiant speech he said “from this day forward, a new vision will govern our land. From this moment on, it’s going to be America First”. Clearly, within his speech the attack on globalisation will create a wave of nervousness around the world given that his vision of “America First” is likely to have ramifications for the rest of the world and the financial markets over time.
Clearly, the stakes are high, indeed after eight years of US President Obama, a devastating financial crisis, ten years of loose US monetary policy, and a period of diminutive yields and extreme P/E multiples, the new President is now talking forcefully about re-shaping America, its economy, regulation, and its relationships with the outside world. This in itself is likely to create an era of structural shifts that could re-shape how the world functions from both a political, economic and trading perspective. Understandably, investors will now need to be mindful that “what worked in the last decade is unlikely to work in the next”.
“The new President is now talking forcefully about re-shaping America”
Undoubtedly in the US an increased government spending programme, and lower tax revenues, might push up public debt, which in turn, could affect the longer-term outlook for the US economy, also the new president-elect’s trade policies could have a detrimental effect, perhaps undermining any positive impacts from his fiscal policy initiatives. Clearly, in recent times the US equity and bond markets have been focused upon the “Trump and Yellen trade” with post-election euphoria pushing Wall Street to new all-time highs, whilst the Fed’s December interest rate hike, and Yellens hawkish outlook on US fiscal policy, effecting Treasury bond yields.
Unquestionably many of the same issues that drove the markets last year are likely to drive them again in the early months of 2017. Issues such as the Trump trade, the UK’s withdrawal from the European Union, invoking Article 50, the political uncertainties within Europe, currency wars, and the direction of crude oil prices are likely to create further fears. However, in respect to the longer-term outlook, a “new paradigm” is in the making as we enter a period of global tapering, stronger US dollar, a shifting of European politics, and a slow- down of the Chinese economy. Furthermore new structural trends seem to be on the horizon, such as protectionism and de-globalisation.
But of course, it is likely to be the first 100 days of President Trumps four year term in office that will determine how investors might react short-term. For instance, former President Barack Obamas first term had the poorest first 100 days of any post-war president, as the market and economy faced its worst financial crisis since the Great Depression. Even his predecessor, George W Bush had a tricky start to his first term in office given that the stock markets was suffering from the fall out of the technology bubble bursting, which in turn, created a brutal bear market. However, Presidents Clinton and Kennedy fared much better delivering positive returns.
“The new President Donald Trump is talking about taking some very big decisions”
Equally, the early days of a president’s term is not always a good indicator of what the US market might deliver over their full terms in office, in fact, Presidents Clinton, Obama, Eisenhower and Reagan all delivered the best stock market returns within their tenure, even when taking into account a problematic start. On the other hand, Bush II and Nixon had the worst full term records.
Clearly the new President Donald Trump is talking about taking some very big decisions about US domestic business, attracting further trade into America, reducing the large balance of payments deficit that the US is currently running, getting wages and earnings up, and limiting the number of migrants coming into the US, whilst giving more jobs to the American people.
Obviously, this will mean big changes for the United States, such as new trade deals with the likes of the United Kingdom, as it leaves the European Union, admittedly, he does seem less likely to do a deal with the European Union, given his comments about Germanys chancellor, Angela Merkel, on the subject concerning migration controls, and European Union trade policies.
Understandably, the markets have responded very positively to Donald Trump’s proposals such as tax cuts, getting more jobs onshore, and his vast infrastructure spending programme but time will tell whether the “Trump trade honeymoon period” can continue. Meanwhile, in the UK the stock market has responded positively to the recent better-than-expected UK economic data, which has seen the FTSE 100 Index climb to new all-time highs.
In respect to Europe gathering political storm clouds are taking their toll, but so far the markets there are responding relatively calmly. As for Asia and the emerging markets, the New Year has started well with the indices benefiting from upward momentum. Admittedly, China is still battling with the slowdown in their economy but there is still some reasonable growth being predicted.
“Theresa May’s Brexit speech has had an initial effect on both the UK equity market and sterling”
Therefore, the overall investment outlook still seems quite positive, and whilst shares are clearly less attractive than they once were, they still seem to be better value than bonds, particularly, if we see companies begin to deliver better than expected corporate earnings and rising dividends, which in turn, should then help to offset any concerns about rising interest rates and inflation.
Finally, in respect to the last five trading days we did experience some equity market weakness, as investors around the world tried to digest and dissect President Trump’s inaugural speech, and from a UK perspective, prime minister, Theresa May’s Brexit speech has had an initial effect on both the UK equity market and sterling. Meanwhile in the bond markets, US Treasury prices lost further ground, whilst the US dollar came under some pressure against a basket of global currencies. In respect to the energy market, Brent crude oil gained some upward momentum, rising by 3.0 per cent, whilst in precious metals the price of gold remained above US$1200.0 a troy ounce.
Peter Lowman Chief Investment Officer
Peter Lowman Chief Investment Officer Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .