Returning themes

24 March 2017

The senseless terror suffered by innocent tourists and Londoners last week was a stark reminder that 2017 still carries many of the same issues as the world of 2016.

Source: Hedgeye Stock markets were served a reminder as well and it almost felt as if my weary comments from last week were read by broader markets. Stock markets stopped rising and even settled down for the week. Obviously, it was not because they shared my concern that a continuation of the recent market gains might lead to an overheating in the near term, but because a number of the assumptions that had driven up markets seemed a bit less certain. Especially president Trump getting stuck with his reform agenda as he is trying to force through Congress a repeal of president Obama’s Affordable Care Act (Right to health care insurance for the all) was single out as a major setback. When he threatened to simply leave the ACA in force as it is and move on, if he couldn’t get his own party to toe his line, there appeared to be differing market interpretations. Some voices saw it as a positive development, because the ACA repeal and redesign negotiations would no longer be a road block in the way to get on with tax and regulation reforms. Others believed that failing with the repeal would leave the Trump administration much weakened to pursue any further reforms that require ratification by Congress. Fact most probably is that the US economy does not desperately require fiscal stimulus or structural reform in order to continue on its recent upward trajectory. However, there are concerns that the high market valuations already reflect corporate tax cuts and fiscal stimulus that may never actually be delivered by the Trump administration. US industry contrary to the stock market appears to not yet believe in Trump’s ‘America First’ agenda. Soft forward indicators like purchasing manager surveys may all be at very high levels, but hard indicators like durable goods orders (machine investment) or commercial loan growth have remained at the lower levels of last year. Combined with the notable slowdown in China’s growth indicators and their reflection in softer energy and commodity prices this leads us to expect that the first phase of the ‘reflation’ cycle that started in the early summer of 2016 may be drawing to an end. By no means does this have to lead to a reversal back to where the state of the economy was at the beginning of 2016, but the so nicely synchronised growth picture around the world is crumbling somewhat. This time around the Eurozone seems to be in much better shape and progressing with more sustainable momentum, which is encouraging given some of the political uncertainties still ahead. The first round of televised candidate debates brought the French 3 ½ hours of aggressive political discourse and the insight that populist Marine Le Pen’s nationalistic message should really only attract 25% of the electorate. This should mean that newcomer Emmanuel Macron’s progressive but more liberal manifesto should eventually gain the support of those who currently side with one of the other 3 moderate candidates. Altogether, we see early indications for the onset of yet another mini-cycle in this otherwise extremely extended recovery cycle since the end of the financial crisis. Stock markets are no longer trading towards new highs, but neither have they fallen much below them. The global economy is still running at a good pace, but we shall be observing market reaction very closely when more investors begin to notice that in the near-term there is an increasing likelihood that 2017 is only turning out to be a little better than 2016, but that a return to the ‘old normal’ may still take a little longer than many thought only a month ago. For the full weekly, please click here