the Trump rally
From the surprise election of Donald Trump as president through late December 2016, the S&P 500 rose by 7.3%. What was, to my mind, much more impressive, though less remarked on, was the 14% gain of the US$ vs the ¥ over that period and its 7% rise against the €.
Since the beginning of 2017, the S&P 500 has tacked on another +4.9%. However, as the charts on my Keeping Score page show, Trump-related sectors (Materials, Industrials, Financials, Energy) have lagged badly. The dollar has reversed course as well, losing about half its late-2016 gains against both the yen and euro.
Where to from here?
The happy picture of late 2016 was that having one party control both Congress and the administration, and with a maverick president unwilling to tolerate government dysfunction, gridlock in Washington would end. Tax reform and infrastructure spending would top the agenda.
The reality so far, however, is that discord within the Republican Party plus the President’s surprisingly limited grasp of the relevant economic and political issues have resulted in continuing inaction. The latest pothole is Mr. Trump’s refusal to release his tax returns–that would reveal what he personally has to gain from the tax changes he is proposing.
On the other hand, disappointment about the potential for US profit advances generated by constructive fiscal policy has been offset by surprisingly strong growth indications from Continental Europe and, to a lesser extent, from China.
This is why equity investors in the US have shifted their interest away from Trump stocks and toward multinationals, world-leading tech stocks and beneficiaries of demographic change.
The case for dollar strength has been based on the idea that new fiscal stimulus emanating from Washington would allow the Fed to raise interest rates at a faster clip this year than previously anticipated. Washington’s continuing ineptness, however, is giving fixed income and currency investors second thoughts. Hence, the dollar’s reversal of form.
Absent a reversal of form in Washington that permits substantial corporate tax reform, it’s hard for me to argue that the S&P is going up. Yes, we probably get some support from a slower interest rate increase program by the Fed, as well as from continuing grass-roots political action that threatens recalcitrant legislators with replacement in the next election. The dollar probably slides a bit, as well–a plus for the 50% or so of S&P earnings sourced abroad. But sideways is both the most likely and the best I think ws can hope for. Secular growth themes probably continue to predominate, with beneficiaries of fiscal stimulation lagging.
Having written that, I still think shale oil is interesting …and the contrarian in me says that at some point there will be a valuation case for things like shipping and basic materials. On the latter, I don’t think there’s any need to do more than nibble right now, though.