Weekly Update: Land that I love

11-11-2016

Mrs. Duessel. Mrs. Duessel. When I got married, it initially sounded very strange to me, having dropped my lifelong maiden name…. We have just witnessed the most stunning victory in American history, Goldman Sachs’ Abby Cohen said, a view I and many others share. The rural/urban divide is real and was badly underestimated by most. Early voting showed a huge Democratic spike and record Hispanic turnout, but Election Day showed massive rural/exurban turnout that shattered GOP numbers going back to Reagan. Trump has said all along that his was a movement, drawing people from all over who felt the system was rigged and the economy wasn’t working for them. For 60% of U.S. households, real income dropped from 2000 through 2015, and lot of these people voted for "hope and change" 8 years ago. Now "it's the economy, stupid," which likely drove a lot of them to vote for change again. Indeed, many of these voters were of the same ilk that propelled Sanders deep into the Democratic primary and blue-collar unionists to vote for Reagan 36 years ago. Ronald Trump? Hmm. Trump’s victory was a strong one for Republicans, whose control of the White House and both houses of Congress ends the Obama-era of divided government and creates the potential to actually act on a range of pro-growth priorities (subject to the limits of filibuster powers by Democrats in the Senate, of course). These include sharp reductions in corporate taxes, a rollback of regulations (particularly parts of Dodd-Frank and the EPA Clean Power Plan), increased spending on infrastructure and defense, and a reversal of portions of Obamacare. Strategas Research says Trump’s agenda could add 1%+ to GDP growth next year, adding to momentum that appears to be growing globally (more below). A liberal friend of mine who clearly wasn’t for Trump nonetheless admitted he was jazzed by the prospect of stronger growth a Trump platform may bring.

Tuesday ultimately will be viewed by investors as a mandate for change—a Republican sweep happened in 1952 with Eisenhower (after 22 years of Democratic administrations), in 1980 with Reagan and in 2000 with Bush. The economic and equity market outcomes of these periods were POSITIVE IN ALL CASES. Moreover, ballast has been restored to the political system. Only a few months ago, pundits were talking about Republicans fading as a major party. History has shown that when either party is in control of all the levers of power, the result is massive fiscal stimulus. For Democrats, it's usually spending, for Republicans tax cuts. If Trump gets his way it will be a lot of both, and the long end of the yield curve is likely mispriced if he can do what he would like. That helps explain why 10-year Treasury yields have spiked more than 40 basis points since hitting a low of 1.72% in a brief risk-off trade shortly after it became clear Tuesday night that Trump was going to win. The combination of massive stimulus amid signs that inflation may be starting to pick up (accelerating wages here, the first increase in year-over-year PPI in China in 4 years, rising commodity prices) is conspiring to drive up yields. Stocks have seen the reverse of the sell-off in bonds, with the Dow reaching a new high this week on expectations for better growth and higher rates that should benefit cyclicals and financials. Rhino Trading Partners believes the move has been too much, too fast. While it’s possible the S&P 500 may break through its August record high, it says the clock’s ticking and all the glad-handing in the world is not going to help earnings and data recover all at once. These things are not linear. They rarely are. Not to mention that this is a show-me situation. 

Largely overlooked because he spent his opening 10 minutes threatening to sue women accusers was Trump’s late October speech in Gettysburg laying out his plans for his first 100 days in office. Later dubbed the “Contract with the American Voter,’’ his program represents an end of Democratic socialism, practiced by both political parties, going back to 2000, says The Institutional Strategist (TIS). Capitalism, in its rawest form since the Reagan years, is back. If adopted early in his presidency, the pro-growth, anti-big government agenda will cause the need for economic protectionism and tariffs—one of the worries of markets—to dissipate. Ronald Trump? Lame-duck sessions tend to be dull for equity prices. However, statements from Senate Majority Leader McConnell and House Speaker Ryan suggest this one may be more productive than normal. Both discussed working toward a stop-gap continuing resolution to keep the government funded through year-end, working with President-elect Trump on a tax reform bill and on a process to repeal Obamacare before the end of the year. All of this would create greater optimism for the 2017 economic outlook. To be sure, Trump is not Shangri-La. His anti-trade rhetoric, the corrosive nature of the campaign and the most contentious election in modern if not all of U.S. history did a lot of damage. It will take time to heal, particularly since Clinton won the popular vote. Protests continue in many cities, where the overwhelming support for Clinton lay. President Trump. President Trump. Sounds very strange: we should expect volatility in the months ahead. Still, I’m reminded of what my 4 a.m. chatty Boston taxi driver with a thick African accent said: “Tis a great nation.’’

Positives

Trump & stimulus JPMorgan says a reduction in the corporate tax rate is likely to be the least controversial of Trump’s growth agenda and thus the easiest to pass. Depending on its final form, these tax cuts could result in an incremental $10-15 boost to S&P earnings per share, which at current P/E multiples could translate into a gain of 150-250 points for the S&P. Trump’s massive infrastructure plans, if passed into legislation in early 2017, wouldn’t impact the economy until 2018 at the earliest. Government spending has been one of the drags on growth this expansion, so a major spending plan would mark a change from sequestration and the fiscal cliff.

Global growth picking up The OECD Composite Leading Indicator rose an eighth straight month in September to its highest level since June 2015, indicating a definitive positive turning point in economic activity even though the long-term average suggests growth will remain below trend. The growth outlook also broadened among countries, providing further evidence of global economic recovery.

Is that Santa I see? Michigan preliminary reading of November sentiment rose more than expected, led by a big jump in expectations and a rebound in inflation expectations to an 8-month high. Meanwhile, the Bloomberg Consumer Comfort Index reached its second highest level since October 2015. Both reports are positive for consumer spending going forward. 

Negatives

Trump & trade If Trump is serious about his campaign promises, on Jan. 20, he can have Treasury slap a 45% tariff on Chinese imports and a 35% tariff on Mexican autos and parts along with labeling China a currency manipulator. Markets would prefer a go-slow approach, Goldman’s Cohen says. But the reality is the GOP is now the party of Trump—full stop. He didn't win with the GOP establishment, he won in spite of it. The question is, will we get Trump the protectionist or Trump the tax-cutter?

Will oil have a friend in Trump? Republican presidents are normally warmly welcomed and supported by the oil & gas industry, but this wasn’t the case with Trump, who said a lot of things on the campaign trail that distressed energy executives, associations and investors, Washington Analysis notes. These included his support for biofuels and suggesting local government should have more say over energy sites. What seems clear is in a Trump energy world, U.S. oil production will be encouraged, the Keystone pipeline may join the ranks of new energy supplies coming from Canada and competition in oil markets will increase. As for OPEC, the calculus has changed.

Near-term U.S. growth outlook remains weak While the global indicator rose, OECD’s U.S. indicator slipped to its lowest level since December 2009. The index has declined continuously for the past 2 years, and has been below the break-even level of 100 for 14 straight months, indicating entrenched below-trend growth. That said, the 6-month trend indicator is off its recent low, suggesting negative momentum has abated. 

What else

Can we all get along? One sign to watch for in the coming weeks is fence-mending between Trump and the Republican establishment. As an ambassador to “movement” conservatives such as Speaker Ryan, whose help Trump will need to implement his agenda, Vice President-elect Pence will be key, Trend Macro says. A key dynamic may prove to be the awakening of the “animal spirits” of the economy, for the first time in 16 years, thanks to Trump’s brash persona, for all its faults. The fact that he was able to get elected as an under-funded outsider, beset on all sides even by his own party, is a spectacular and inspiring act of entrepreneurship.

Sector winners & losers Renaissance Macro sees defense & infrastructure, construction & materials, metals, coal, machinery, health care, banks and Russia as winners under a Trump administration. Sectors/countries suffering the most could be Mexico, emerging markets and their currencies, and clean energy stocks.

Trump: the new Jackson? Once upon a time, Medley Advisors recalls, an uncouth populist ran for president, creating a massive realignment of the American political parties. With the support of masses of rural voters living far from the seats of power, he railed against the corrupt financial elite who controlled the lives of America's common folk. Those elites were aghast when the suspected illiterate actually won the election, and more so when he brought legions of crazed yokels to D.C. for his inauguration. But they got over it eventually. Today, Andrew Jackson's portrait is on the $20 bill.