Gridlock on Capitol Hill: What Markets are Conveying
In the seven months since the November 8th election, markets have reacted with spasms of optimism and pessimism. For example, the Dow futures dropped nearly 900 points once election results became clear that Donald Trump would be the next president of the United States. Subsequently, stocks would reverse, and the Dow would end the following day up 257 points. That’s a reversal of 1157 points in less than 24 hours. Most U.S. stocks would rally aggressively through year-end based on Trump’s campaign promises of tax reform, tax cuts, and infrastructure spending.
Conversely, based on Trump’s protectionist views (which include the construction of a wall, crackdown on immigration, and terminating existing free trade agreements), emerging market stocks were dumped as well as most other international assets.
Chart 1 below illustrates the performance of major asset classes affected by Trump’s campaign rhetoric.
Asset class performance in 2017, in many cases, indicates a different story. Small Cap stocks that would greatly benefit from tax cuts have had minimal gain, foreign stocks have rallied significantly and are some of the best performing assets year-to-date, and gold has fully recovered from its recent selloff. Chart 2 below illustrates asset class performance thus far in 2017.
What markets are telling us is that investors have fully discounted (and minimized) Trump’s campaign promises while acknowledging gridlock on Capitol Hill, even in light of a GOP-led Congress. Instead, investors have focused on the improving outlook for global growth where both developed and emerging economies are now expanding in unison, while the dollar has dropped precipitously as the United States is increasingly being viewed internationally as isolationist. Further weakness in the dollar would likely have negative implications for inflation, thus the better relative performance in both TIPS and gold.
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Written By Robert Okada, CFA