By far the biggest surprise of 2016 came in early November, when contrary to almost all the polls and prognosticators, voters chose to elect Donald Trump as the next President of the United States. Republicans also retained majorities in both the Senate and the House. After a short-lived but intensely negative reaction during the early morning hours of November 9th, global markets abruptly recovered, seemingly encouraged by Trump’s victory speech, which was measured in tone.
During the remainder of November and December, investors turned their attention toward the potential for a Republican-driven “growth package” of fiscal stimulus (up to a $1.0 trillion infrastructure spending plan), regulatory reforms, tax cuts and tax reform that could include a program to repatriate the large cache of funds currently held offshore by U.S. corporations. Investors seem to be anticipating that pro-growth policies may be forthcoming from the Trump administration and could have a reflating effect on the US economy, at least in the near term. We seem to be witnessing an acceleration of the trends that were apparent in 2016, including rising interest rates, a strengthening of the U.S. dollar and record highs for the major U.S equity indices.
One way to consider the current outlook for the global capital markets for 2017 and beyond could be in terms of different phases. The first phase, which took hold almost immediately after the U.S. presidential election, might be considered the hope phase, with investors assuming (hoping) that the policies of the incoming Trump administration will finally induce the much sought after “animal spirits” which monetary policy alone hasn’t been able to rekindle since the financial crisis of 2008. That said, the next phase could be the disappointing reality phase, where investors will learn whether the economic policies enacted in Washington will succeed in lifting economic growth commensurate with the current appreciation of the financial markets, and U.S. equities in particular. The question for investors is – Will economic growth take hold in time to justify the prospect of future rising interest rates, inflation and even larger government deficits?
Herein lies the race against time for the global capital markets.
DeFred G Folts III
Chief Investment Strategist
DISCLOSURES: The opinions expressed above are those of DeFred Folts of 3EDGE Asset Management and are subject to change without notice. These opinions are not intended to provide personal investment advice and do not take into account the unique investment objectives and financial situation of the reader. Investors should only seek investment advice from their individual financial adviser. These observations include information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed. Investments in securities, including common stocks, fixed income, commodities and ETFs, involve the risk of loss that investors should be prepared to bear. Past performance may not be indicative of future results.