As we have been discussing for months, from a strictly economic and financial markets perspective, history suggests that the party in the White House has little impact on broad long-term investment outcomes. However, an administration can have significant impacts on individual industries through regulatory change and other tools. The current administration appears different from others in their willingness to speak directly to certain industries and companies in unconventional ways. Off the cuff comments have seemingly harmed certain stocks for short periods of time, though their stock prices have bounced back in short order.
More broadly, this administration has talked down the value of the U.S. dollar, suggesting an end to the “strong dollar” policy that harkens back to the Clinton administration. Here too we think the long-term effects will be limited. While some countries actively manipulate their currency, the value of the U.S. dollar is driven by a complex array of market forces, which should overwhelm political commentary.
In our open system, markets overpower rhetoric. Global demand for U.S. dollars and central bank policy have real implications for the value of the U.S. dollar relative to other currencies. As far as we can see, stricter bank capital requirements and disparate central bank policies should keep demand for the greenback at high levels, which supports the value of the U.S. dollar.
Still, we can look at the President’s stated policies and objectives to get a sense for where things may be headed. While there are many sides to consider with each potential policy and its implications, the following table summarizes our thoughts on the economics of several proposals.
Meanwhile, fundamentals continue to improve. The “Goldilocks” January employment report released on February 3rd showed 227k jobs created versus 175k expected. At the same time, wage pressure is not so strong that the U.S. Federal Reserve (the Fed) should feel threatened by inflation at this point. With the Fed still on hold and economic fundamentals improving, our economy can continue to grow with markets rewarding risk assets like equities.
The U.S. economy is showing broad signs of acceleration in 2017, including increases in manufacturing PMI and consumer spending, as confident households have decreased their savings rates to a still healthy level while increasing spending.
Furthermore, growth in the U.S. can help pull global growth higher through increased trade. This should build on the strength that we are already seeing in data from Europe and Japan. For example, euro zone business confidence is at multi-year high, despite potential political risks coming from the pending election in France. Meanwhile, European and Japanese manufacturing PMIs are higher than they have been in several years.
More broadly, euro zone leading economic indicators have increased 1.00% over last 3 months, compared to 0.73% for the U.S., which is also showing improvement.
Though the Fed has started tightening monetary policy by raising interest rates and letting its balance sheet drift, both the European Central Bank (ECB) and Bank of Japan (BoJ) continue to expand their balance sheets by 32% and 24% respectively, adding more stimulus to the global economy. We think that this additional stimulus will work its way into foreign asset prices, while supporting U.S. dollar strength.
While fundamentals supporting global economic growth have been improving for months, the post-election rally seems to have priced-in much of the good news. As we look around the globe for investment opportunities within this constructive context, we search for areas with attractive relative value. Compared to long-term averages, we are finding attractive relative value in both Europe and Japan. Combined with improving economic fundamentals globally, central bank stimulus could serve to unlock the investment potential that these stock markets represent. Furthermore, as interest rates have risen, we are finding other attractive yield opportunities, such as high yield municipal bonds and preferreds, as well as MLPs, and REITs, which we capture in some of our diversified income holdings.
THE CASH INDICATOR
The level of the Cash Indicator (CI) has declined in recent weeks as credit spreads have tightened, confirming the recent confidence displayed in the equity markets. While we expect market volatility, potentially driven by European political risks or Fed policy tightening, the CI suggests that this potential volatility is likely not a precursor for a dramatic market decline.
Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not be taken as an advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.
Data is provided by various sources and prepared by Stringer Asset Management LLC and has not been verified or audited by an independent accountant.