The baton is still being passed to the real economy and fiscal policies and away from monetary efforts. The Fed decided to raise the federal funds rate yesterday even as growth has remained quasi-recessionary. The flat treasury yield curve does not seem to be buying into the growth dreams of stock investors, so it looks like future tightening may be more problematic than many seem to think.
The subprime-fueled auto boom looks to be on its last legs as loan defaults rise and used car prices fall. A glut of cars will be coming off lease in coming quarters. Auto sales had been a key positive for growth. Yesterday’s (12/14/16) retail sales and industrial production reports confirmed that the strong growth story is simply more wishful thinking.
As we said last month, the new administration may be just the excuse the Fed needed to lean toward tighter policy. We think the FOMC might secretly buy into the Trump hype as well, if only because it dutifully follows the accepted market views. The tighter Fed and the resulting stronger dollar are forcing the hand of other central banks that face intensifying currency pressures that can cause import prices to rise beyond what local consumers might accept. They cannot remain as accommodative as they otherwise might and that is a growth drag. The balance is tenuous.
Last week, the ECB moved to diminish its QE program in terms of monthly purchase amounts, but will continue for a bit longer than originally planned. Even the BOJ is somewhat less heavy-handed for now on the monetary front, though it has become more opaque in its operations. This transition period will be a tricky maneuver fraught with risk because markets grew entirely dependent on ever increasing monetary interventions for seven years.
In the U.S., all hopes and dreams are now seemingly predicated on the success of new fiscal policies and deregulation out of D.C., but we re-emphasize that economies still face late-cycle headwinds and secular trends that will likely overwhelm or significantly dampen any short-term boosts that new initiatives may bring. Most importantly, the current fancy of waxing poetic about the Reagan years may be fun and all, but Trump will be coming into office with stocks at extremely expensive valuations. From an investor’s standpoint, that is all that matters and a key difference between now and the early 1980’s.
Those who seem determined to spend hard-earned money on stocks based on a Trump miracle of some kind might want to keep in mind that given the current equity pricing environment, that trade is more than just quite crowded, it’s gone viral. The “greater fool theory” nature of current trading is running into the fact that in terms of percentiles of valuations over the years, at current levels it has been just about impossible to find a marginal buyer historically. We don’t like that math.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.