As The Trump Rally Powers Forward, Why Are Some Skeptical?

Investors who are viewing the coming years with “excitement over a more free-market economy and the appearance of a clear path to higher equity prices and bond yields” are enjoying the Trump Rally right now. Since the election, the S&P 500 has run up near 9.54% on the S&P 500. That’s not a bad year and it happened in three months in the face of trade headwinds, diplomatic woes and “alternative facts.” Is the stock market flying higher in the face of policy uncertainty headwinds the ultimate alternative fact? Could this be why Macro Allocation’s Paul Brodsky just isn’t “excited?”

Is the current “Trump Rally” running on optimism or realism?

There is tremendous excitement over what is really nothing more than potential at this point. US President Donald Trump has an opportunity to accomplish what has never before been done. While some of the Trump administration’s projections sound grand – a 4% GDP target is a tad ambitious given the stage of the expansion cycle and debt levels, for instance – there is a difference between optimism and realism.

Brodsky looks at the totalities of the Trump tailwind and comes up with a “mixed bag at best.” In a January 26 Macro Allocation piece titled “Contrarianism in 2017,” he notes the Trump economic vision is not clear and littered with “structural macroeconomic headwinds.” He is not alone, as Jeffery Gundlach, who predicted the Trump ascendency, is wondering when the party will end.

“We have long been hopeful that something or someone would come along to provide a less encumbered, less punitive business environment,” Brodsky hopefully wrote before pulling the punch line. “And yet we remain generally cautious on stocks, bullish on Treasuries and gold, and negative on credit. Why?”

Answering Brodsky and his “why” question

To look at Trump’s policy prescriptions takes a different worldview than in the past. Much of his bluster that is common in power-driven business transactions but surprising in polite diplomatic circles might just be “stronger global negotiating position on behalf of US businesses.” This Brodsky welcomes along with “incentives for businesses to choose domestic production.” But doing so at the point of a gun through import tariffs that appear arbitrarily applied might not lead to the desired outcome.

There are primary Trump policy benefits are not always clearly positive:

• reducing restrictive financial and commercial regulations, which would help businesses expand and grow revenues

• reducing corporate taxes and providing amnesty to US businesses holding cash abroad, which would increase the potential for domestic capital goods and labor expansion

• emphasizing US output growth at the expense of global trade volume, which has the net effect of actually diminishing US output growth

• emphasizing US job creation at the expense of bottom-line earnings, which has the net effect of stretching market valuations in the near term and revenues over time

• rhetorically keeping the dollar down (which is to say stable) in the FX markets, thereby

The net effect of these ambitions is “unclear” amid what could be unintended consequences:

Alongside these pros and cons are market and structural macroeconomic headwinds that tip the scales towards a negative outlook and keep us in contrarian market expressions:

• already steamy global equity market valuations

• already over-leveraged global balance sheets

• already old and aging global demographics

• already nervous US trade partners with alternative options for trade

• already hostile reactions from potentially belligerent foreign trade partners seeking to replace US global market share

These are understandable probability paths and they all point to uncertainty.

The stock market might well sprint past 20,000 and very short those Dow 30,000 hats are sure to become as popular as the “Make America Great Again” tag. But look logically at the pros and cons driving the current rally and realize this might be a bull market extension to tread tepidly with.

The protectionist trade instinct that is manifesting itself in a policy that is built on “global commercial inefficiencies.” Slapping tariffs on products “cannibalizes growth and creates unsustainable economies,” Brodsky noted. But there is a larger context. “US populist politics, when manifest, is likely to reduce US market share in the world and limit the revenues and earnings of US multinationals.”

That’s bad for business. Yet the stock market continues to climb.

The post As The Trump Rally Powers Forward, Why Are Some Skeptical? appeared first on ValueWalk.

Source: valuewalk