Dislocation
Amidst all this ongoing political ‘noise’ Stateside, American and Canadian stock markets are continuing to record highs. By referring to the headlines and happenings of the new administration as ‘noise,’ it’s not my intent to make light of the day by day revelations, but illustrate how it has become a distraction from the markets and the economy. For a break, I will leave the otherwise unavoidable political debate to the pundits.
US Stock markets have been led ever-higher by financials. Over the last 3 months the S&P500 has gained over 7 per cent. Dow component financials such as JPMorgan Chase and Goldman Sachs are up 16 and 19 per cent respectively over the same 3-month period. Even over the last month, Trump’s first 30 days in office have seen the best performance of the Dow Jones Industrial Average by any president (first or second term) since FDR in 1945, (and these are not alternative facts).
Many seem to make the case that the markets are rallying because there finally is a sitting president that is good for the economy, and thus expect this trend to continue. Although, those select analysts or commentators may be right about the equity markets continuing to rally, I’d suggest they are right for the wrong reasons. I am yet to be convinced of a reviving US economy.
Financials are the first piece of proof. The present scenario is one where financial stocks are outperforming the market because anticipation of a wave of deregulation. This will require action by Congress, led by Trump’s Director of the National Economic Council, former Goldman Sachs President Gary Cohn. Details, however, are sparse at this point. Additionally, another reason for bank stocks rallying is the anticipated economic policy that is nothing but inflationary. Higher inflation raises the US Fed’s tightening path, and thus wider margins for banks. Ultimately though, the market seems convinced that the period of zero interest rates and squeezed margins for banks is coming to an end.
A more competitive tax regime in the US may be another reason for markets continuing to advance. This may attract investment and capital back to the US, but the unknown has to be whether that will contribute to increased capital spending and hiring by businesses. That story on its own is of course positive for stocks, but it can be positive also because companies are simply looking to increase dividends to shareholders or buy-back stock.
I do see some of these aforementioned investment themes very probable for 2017. It seems likely the US will move forward with a simpler and more attractive tax structure. Furthermore, simplifying Dodd-Frank will be welcomed by Wall Street and conveniently, former bankers hold the top seats as Treasury Secretary and the Economic Council. What this spells out for precious metals though, is a challenge.
Gold has traditionally been uncorrelated with financial markets. Typically, it’s a safe-haven and trades higher when investors are moving out of risk assets, and given the opposite at the moment, these themes could be negative for gold demand. There is a market saying though that “the stock market predicted 9 of the last 5 recessions.” Analysts use to look to markets as a forward indicator of the economy. This is becoming less and less prevalent as the two (stock markets and the economy) dislocate from one another. This could eventually be the positive story for gold.