At first glance, it appears to many that the “Trump bump” finally subsided in March after shares in the US rose by 12% from the election to March 1st.
But relative to the rest of the developed and developing world, the US market underperformed, and most analysts have pointed to the failed health care reform bill as the catalyst. It’s no understatement to say that the election of president Trump has affected the global economy, but as is often the case with attention grabbing headlines, the overall effect is overstated. In this update, we’ll look at the fundamental data that’s fueling global markets right now.
*Equity Indices - FTSA Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index
The fact that Trump’s administration failed to get consensus on the health care reform bill does raise questions that he may have trouble garnering support for the much-anticipated tax reform bill to take effect in 2018. While tax reform should be a positive boost for US corporations, the broader effect of a tax cut is not certain, as we saw when Britain cut their marginal taxes in 2010 yet saw no significant economic boom in the years that followed.
Having said that, we can draw comfort from the effects of an increase in infrastructure spend, stronger hiring in both the US manufacturing and service industries, and the resulting impact on consumption. These factors alone are significant enough to inspire a favourable outlook.
One factor that might tamper growth is the Federal Reserve’s plan to combine rate increases with an unwinding of excess capital currently sitting on bank balance sheets. Lowering the money supply reduces capital for banks to lend, but with the current levels of excess capital on balance sheets, this move should not significantly affect the broader economy.
And the rest of the world
The rest of the world does not hang on the president’s every word as investors in North America do. Global markets have been moving up, not on a “Trump bump,” but on positive data coming out of all corners of the globe. By late 2016, Asian exports and spending were picking up. Industrial profits in China were up 31.5% in January and February over the previous year.
2017 growth forecasts for emerging markets and commodity prices have been reinforced by the news and emerging economies have outperformed the US by about 4% year-to-date.
European growth has been fueled by positive consumer sentiment and improvements in the workforce. At 9.5%, Euro-area unemployment fell to its lowest level since 2009. The European Central Bank’s moves to boost growth potential appear to be paying off.
What it means for your portfolio
A key tactic to successful investing is being able to block out the noise, without blocking out the real news. It’s easy to get swept up in short-term reactions to eye-catching headlines, but the long-term forces that drive your portfolio will revert to the fundamentals that drive them. As Warren Buffet likes to say, “Uncertainty is the friend of the buyer of long-term value”.