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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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It's November 8th ...... ring any bells ? ref :- "A year in : U.S. stock market under Trump's shadow" , Reuters Markets

November 8, 2017

 

Of course we knew that US presidential elections take place every four years, but we had to look up how the actual date of the election is chosen  --  it's the first Tuesday after November 1st, apparently. So it was that on Nov 8th last year, Donald John Trump was elected as 45th president of the United States. 

 

Time will tell just how just how much importance will be attached to that date when they come to write the history books of this period, but already it seems like an awfully big deal  --  as everyone must have suspected it would after the election of a populist outsider with his own way of doing things, and with little regard to the conventions normally associated with his position. Quite where Mr Trump's "America First" protectionist bent will ultimately lead the world economy if pursued in full is still anybody's guess, and as for his gung-ho approach to hugely dangerous geopolitical developments ..... well, it's understandable if that's made some observers a little edgy about the future.

 

We can see however how the markets have behaved over the last 365 days, and there's no doubt that the Trump agenda of tax cuts and reform, and the promise of large-scale infrastructure spending (fiscal stimulus, in other words), ignited a stock market rally that's still playing out. Ironically, the shock of the Trump victory had the instantaneous effect of causing the Dow Jones Industrial Average to slump 900 points, before a more considered view on what his economic policies might mean for companies and markets overcame the other misgivings about the incoming President. The Dow was to close up 250 points on the day, above 18,500.

 

Since then the Dow has closed at a record high over 70 times and finished last night at 23,557, just 45pts off the all-time high. The S&P 500 has posted 52 record high closes in calendar 2017 alone. 

 

As we were only saying on Monday, Mr Trump is keen to take personal credit for the stock market rally ..... and directly equates the performance of Wall St with the health of the economy. Of course, they're not always the same thing but on a narrow, rather simplistic level he is right. His pro-growth, generally business-friendly policies  --  or rather the expectation of them  --  have been a big factor in this rally. So too has his push towards deregulation ..... the resurgence in stocks in the hugely influential banking sector that would benefit from deregulation has been second only to the all-conquering tech sector.

 

The trouble is that whilst attempting to gather all the plaudits, Mr Trump may be missing some important points. He can't really take much credit for the very strong corporate earnings reports in 2017 that have been the other major driver of the market's climb. And even more fundamentally, the administration may have promised the kind of policies that gets markets excited but as we stand at the moment it is yet to actually deliver on any. There has not been one major legislative victory (though there have been a number of failures), and the whisper this morning is that the crucial tax-cutting bill may be in a spot of bother, with talk about a one-year delay in the all-important cut in corporation tax from 35% to 20%.

 

There has always been, and remains, a very fair chance that the Tax Bill would not get through in the form put forward by the administration, and theoretically mucking around with plans to cut corporation tax  would have to be a sizeable blow to corporates and their share price. Whether we'll see any such concerns reflected in stock market performance is a moot point however, such has been investors' ability to focus on the bright side. Even the absence of any plan for infrastructure spending has failed to dampen investor enthusiasm.That's been a bit of a mystery to those who keep looking for some sort of pullback ..... which itself would not necessarily be entirely unhealthy in the greater scheme of things. 

 

Who knows ..... maybe the spectre of a government shutdown will give the bulls pause for thought. The current spending deal, itself a short-term sticking plaster, expires on Dec 8th and it would be fair to say that at present Congress look a long way from making the numbers stack up. Republicans and Democrats have very different priorities of course  --  the Mexican Wall versus the rights of young immigrants, to chose a deliberately extreme example. Enough to stop the runaway train ? We'll see .....

 

And whilst we're on what's happened since Mr Trump's victory, what's happened in the bond market ? Pro-growth policies and fiscal spending, and the inflationary pressures that they're expected to bring with them (eventually), would naturally imply higher rates and yields. Even if inflation is yet to bear its teeth, decent growth and very strong employment data has duly encouraged the Fed to continue it's course of gradually tightening the Fed Funds rate. The short end of the bond market has also played the role that one might expect : the yield on the 2yr Treasury (1.63%) is the highest in over a decade. Further down the curve it's a different story.

 

On Election day the 10yr Treasury yielded 1.86%. Little more than a month later (15th Dec), the pro-growth, reflationary Trump agenda had pushed the yield up to 2.60%, and it made a high of 2.63% on Mch 13th. The yield now ? ..... Back down to 2.30%.

The Fed may have started a gentle reduction of its balance sheet, but the ECB and the Bank of Japan are still adding liquidity with their QE programmes. The global search for yield makes US Treasuries much in demand, which in turn pushes down yields.

 

We keep hearing from a number of bond market gurus that the end of the great bullish bond market is nigh, and that yields are going to spike. But breaks of technically important yield levels that were supposed to signal much higher levels (2.40% , 2.60%) have so far let those gurus down. That's not to say it won't happen, just that it may take irrefutable evidence of a solid rebound in inflation before it does.

 

In the meantime, the contrasting fortunes of different maturities in the bond market are doing strange things to the yield curve. The premium of the yield of the 10yr Treasury over the 2yr is in to 67 basis points, or 0.67%. That's the lowest for over a decade. It's not infallible, but flattening yield curves are often the precursor to slowdowns in growth, and inverted yield curves (short-term yields higher than longer-term) are taken as a harbinger of full-on recession.  Now that's a possibility that definitely wouldn't have been on Mr Trump's agenda.

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