Over a year has passed since the election of Donald Trump. It’s been a fascinating period in political circles and, according to CNBC, in investing markets. But has the market really been that interesting? Profitable, no doubt, but from a price action standpoint, there’s not been much to report – the market just chugs along, seemingly going up almost every day. In fact, since the election through Nov 30, 2017, the S&P 500 has risen 155 of 266 trading days and has not had a losing month since before the election. Over that time the market’s greatest one day gain has been 1.4% and its greatest one day decline has been 1.8%. Even more remarkably, we’ve also not had any sort of a meaningful correction whatsoever. The largest peak to trough drawdown has been 2.8% which occurred from the beginning of March to mid-April.
Given all that, market volatility, as measured by spot VIX, was at its highest just prior to the election and has hovered around 10 with notably few spikes since then.
Boring, but we'll take it.
As they often do, many market prognosticators are forecasting pending doom. Yet, these forecasts are more shrill than usual as the distractions (very often caused by the President himself) from Washington are seemingly indications that the current environment cannot continue and a major revaluation of equities is imminent. A representative sampling of headlines follows:
“Why the Trump Bump Has Set Us Up for a Market Crash” – Fortune Magazine, Mar 7, 2017
“The Stock Market Has Been Magical. It Can’t Last.” – NY Times, Aug 19, 2017
“I Cannot for the Life of Me Understand Why the Market Keeps Going Up” – Mike Bloomberg, Sept 20, 2017
“Waiting for the ‘Trump Slump’ in the Stock Market” – The New Yorker, Oct 18, 2017
Yet the market continues to rise. But why? In our opinion, the answer is relatively simple: pure, unrepentant economic growth and profits. Yet it’s not just the U.S. enjoying an improved economic growth trajectory – it is a global phenomenon. Unlike a couple of years ago when several economic regions were struggling, Europe, Asia, and the Emerging Markets are all now experiencing enhanced growth rates with low levels of inflation. Even notable non-growers such as Japan are experiencing faster rates of economic activity.
Can we put the secular stagnation arguments to bed, now?
A resurgence of constructive fiscal policy initiatives both in the US and abroad are now offsetting some of the “structural headwinds” that previously impacted the global economy. Regulatory reform )in the US) has been in full swing for nearly a year now impacting a wide range of industries and sectors. (Details of various regulatory initiatives can be found here.) Year to date through September 30th, deregulatory actions have outpaced new regulations by a ratio of 22 to 1, with an estimated economic benefit of nearly $10 billion. And it appears as if this trend is just beginning.
More recently, and most importantly, the Trump administration passed a tax reform package which will have sweeping effects on rationalizing and simplifying the US tax code, creating a more competitive landscape for US corporations. And yet again, this is not exclusively a domestic phenomenon. Globally, policy makers will need to respond to this change in US tax policy in order to remain competitive and you are now starting to see evidence of precisely that.
You can have "green shoots" in tax rates too!
So, we would suggest the doom-and-gloom crowd may again be wrong. The combined effects of tax and regulatory reform, which have clearly benefited the economy and markets for over a year, can continue to have a positive effect on commercial activity and ultimately risk assets.
At Crow Point Partners, we evaluate several key economic and investment variables to determine the attractiveness of the economic environment and whether we believe that investors will be compensated for taking risk. Overall, right now, we believe that the economic and investing environment will remain attractive in 2018 and we have maintained aggressive risk postures in the portfolios which we manage.
Crow Point Global Macro - 2018 1Q Key Economic & Investment Drivers
Risks are always present and the current environment is not void of them, in spite of the generally favorable backdrop. Any variable that diminishes the positive feedback loop of constructive policy, improved economic activity, increasing profits and ultimately rising stock prices is something to be taken seriously, particularly at today’s lofty valuations. In as much as an improved fiscal environment has created this virtuous cycle, politics and policy makers do represent the biggest visible risk to investment markets. Could we be one big geopolitical event away from a meaningful correction? Always. But, the current administration has been making it clear it is a friend of markets and the US economy. Until global economic growth and the animal spirits that are clearly in evidence show any signs of reversing, we remain long risk assets and expect markets to grind higher.
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ABOUT THE AUTHOR
David Cleary, CFA is a Principal and Portfolio Manager at Crow Point Partners
Previously he spent 23 years at Lazard Asset Management where he held a series of senior portfolio management roles over multi asset and global fixed income strategies. He additionally served as the firm’s global head of fixed income, a $26 billion platform. Prior to Lazard, Mr. Cleary worked at UBS and IBJ Schroder, mostly in fixed income asset management roles. Mr. Cleary began working in the asset management field in 1987 upon his graduation from Cornell University, with a BS in Business Management and Applied Economics. Mr. Cleary is a CFA charterholder.
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