Since the election of Donald Trump in November 2016 and his swearing-in on January 20, 2017, each day has brought its share of headlines and comments that impact financial and economic developments in the United States and around the world. Mr. Trump is issuing numerous executive orders, many of which are perceived negatively, which is causing concern in the markets.
The consequences of some of these already official decisions, and of the fulfilment of other electoral promises by the new president, promise to be considerable. Here are two that should be watched closely.
Stronger inflationary trends
In the second half of 2016, inflation rose in the U.S. and in many regions of the world, due among other things to the rebound in the price of oil during the year.
- The rise in oil prices, along with the implementation of various pro-growth policies by the new U.S. administration, should continue to fuel this inflationary trend.
- The expansionary fiscal measures advocated by President Trump will put upward pressure on U.S. wages in this period of particularly low unemployment. The anti-immigration policy that is likely to be adopted and the probable levying of tariffs on imports from China and Mexico will also drive up the consumer price index in the U.S.
In Canada, inflation rose slightly in December and this trend could continue in the coming months due to wage increases and a possible weakening of the loonie, which would boost the price of imported goods.
Renewed appetite for riskier assets
In the wake of the regime change in Washington, investors have regained their appetite for riskier assets, including corporate debt securities, high-yield bonds and, of course, stocks.
Although the market rally observed after Donald Trump’s election has cooled somewhat, global stock markets continue to rise, with emerging markets posting the strongest gains. In the U.S., the Dow Jones index set a record in late January, topping 20,000, while the S&P 500 saw its stock market capitalization exceed the $20-trillion level. Canada’s leading stock market, the S&P/TSX, ended 2016 with an outstanding return of more than 20 per cent.
While most observers believe investors have already discounted the positive impacts of the pro-growth measures that will be implemented by the new U.S. government, stocks still remain the asset class with the best return potential, although the stock market rally since November 8 could limit future gains.
What the fundamentals say
|At the time of writing, the risk of recession is low for the next 18 months and most of the fundamentals are at levels that are no cause for concern. Some must be followed more closely, however, such as the U.S. benchmark rate, the risk premium on the sovereign bonds of Italy, Spain and France, and U.S. stock market valuations. Investor complacency is in fact the biggest threat for the financial markets at the beginning of this year.|
The Financial’s strategic perspective
We remain optimistic about the stock market outlook, with some provisos:
- The investor confidence level appears very high to us.
- The markets seem to be disregarding the negative impacts that some of the U.S. president’s policies could produce, including the massive debt that will result from the coming tax initiatives.
In this context, we continue to favour a higher equity weighting in our portfolios.
Our strategy will be reassessed as the fundamentals evolve and as the Trump administration’s policies are put in place. As usual, we will keep you informed of any strategic adjustments to the funds you hold with Professionals’ Financial.
François Landry,CFA Senior Vice-President and Chief Investment Officer