The contours of economic policy under the Trump administration have yet to be fully fleshed out.
One interpretation of the market action since the election is that there is a substantial likelihood of fiscal stimulus in the form of tax cuts and perhaps infrastructure spending. The President will need to negotiate with both the House and the Senate which have different priorities than does the President Elect. Additionally the GOP holds only slim majorities in both houses, increasing the chance for a small number of legislators to derail the process – at least temporally. If the normal timetable holds we will not see a budget from the new administration until February and House and Senate budgets until March. The negotiation process will then begin. This gives plenty of time for the markets to be disappointed by what may turn out to be an unusually public negotiating style.
The morning after the election I noted that the president has much more autonomy in trade policy. I feel that my comments are still germane: unlike in fiscal policy, the President is able take unilateral actions which may sound like the first shots in a trade war. Combine fiscal policy with trade policy and era of Government By Tweet may offer plenty of examples of what my bond trader father used to call Tape Bombs. These are shocks in the form of unexpected, inherently unpredictable pieces of news which the market reacts and over-reacts too. Recall the summer and fall of the debt ceiling to get a sense of what I mean.
At Astor we think that in times like these is even more important to approach the markets with a discipline which clarifies decision making by keeping the focus on facts not predictions. In our case we will continue to use the state of the of the business cycle as it unfolds as our key input in making investment decisions.
Closing with the fed, my judgement and that of the fed funds futures market (which has a conventional interpretation, see this CME page for example) is that the FOMC will raise rates at the next meeting. Using the same interpretation of the fed fund futures curve shows that the market is expecting another hike or two by next year, though the market has been repeatedly disappointed in the last several years. Two things which could make the fed hike more quickly than the market expects would be a sustained rise in core inflation or the prospect of substantial fiscal stimulus. Keep on the lookout for comments by fed governors making the connection between the monetary and fiscal stances of the US.
Overall the economy continues its recent path of modest growth. With some headwinds dissipating we may be hope that next year will be on the upper end of the recent range of growth. As always we will continue to monitor the economy closely.
John Eckstein is the CIO at Astor Investment Management, a participant in the ETF Strategist Channel.
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All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.
The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change. 312161-553
