It was so clear, right? Trifecta. We were headed for tax reform, infrastructure spending and deregulation. The economy was about to take off, replete with a rising dollar and budding inflation. At least that was the popular story at the beginning of the year.
Not so fast. Nothing is as easy as it seems. Distraction from the economic agenda has taken hold, and investors are sporting a wait and see attitude. So far the dollar is down, inflation continues to go nowhere and the economic data is mixed.But we have barely started the month of February. Although it doesn’t take much to unnerve markets, US stocks are up 2.8% (S&P 500) through Friday. The unhurried rise in stock prices is actually healthier than the torrid pace of the early Trump rally. And “on hold” is far better than “pull back.” Investors really do want to give the Trump rally a chance to be real.
So here is what counts for the party to continue
- Fundamentals. By fundamentals be mean the economic indicators that we watch daily to help read the strength and direction of the economy. Take the Friday’s Jobs Report. The news was good, but not too good. 227 full time jobs were added last month while the number of individuals working part time jumped a healthy 242. Although the unemployment rate ticked up one tenth of one percent, the figure resulted from more people entering the labor force looking for work. That signaled full employment had not yet been reached and the economy has more room to expand and heat up before looking vulnerable.
On the other hand, wage growth was modest at best (3 cents an hour) and the average work week (34.4 hours a week) remains low. Taken together the labor numbers signaled that the economy could trudge forward for a while longer before being threatened by Fed rate increases or inflation.
- Two more legs. Most stools have three legs; our economy has four – the consumer, businesses, monetary policy (created by the Federal Reserve) and fiscal policy (government taxes and spending).
The period between the financial crisis and today has been dominated by two legs: consumers and the Federal Reserve. Fiscal policy got caught up in gridlock for most of the Obama years, and businesses hung back on their capital spending and hiring. More gross private domestic investment is needed for the economy to accelerate towards 3% GDP or higher. The supposition is that the Republican sweep provides a good chance for businesses to feel more confident about spending and for Congress to pass legislation targeted towards lower taxes and increased infrastructure expenditures. Ned Davis Research estimates that fiscal stimulus could add anywhere between 0.5% and 3.2% to GDP, with the potential for those figures to be partially offset by a rising dollar.
- Global growth. Although global markets opened the year generally stronger than the US markets, international stocks get mixed reviews. Our research shows that the global economy is reviving and the risk of global recession is subsiding. Monetary policy worldwide is still accommodative, making money relative cheap for individuals and businesses to borrow. Moreover, like the US, other global governments are initiating or contemplating more fiscal policy. Even rising rates in the US could be viewed as a plus for global equities, if rate increases are deemed to be a reflection of an improving economy.
However, there are some cautions to the global expansion trade. China is somewhat of a wild card, as they may have to slow down credit availability and fiscal spending later in the year. Any increase in protectionism could result in unwanted trade wars potentially prompting inflation and rising prices. And low overall global demand and labor productivity are likely to put a limit on growth. Never mind that political risks appear to be abundant.
Above all, it’s a big, dynamic world out there. Even though the outlook for the global economy is improving, there are risks in getting the allocation right. The two major independent research firms we use are split on their views of international investing. One likes emerging markets and is cautious on Europe. The other recommends overweighting Europe and avoiding emerging markets. While it is important to be invested overseas, especially if global growth is stronger than expected, it is also wise to recognize that the US is much further out of the woods than the rest of the world.
We are only one month into 2017 and off to a much better start than last year, but tempering expectations can be a wise strategy.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.