Fed Tightening – Tightening policies are inherently designed to bring slower growth. Rising rates are also an impediment to the housing and auto markets.
Infrastructure Limitations – Mr. Trump plans $1 trillion of infrastructure spending over 10 years, however, we have already seen how little impact President Obama’s 10 year $860 billion “shovel ready” infrastructure program launched in 2009 has had on the economy.
U.S. Dollar Strength Limits Growth – As the U.S. dollar strengthens, it becomes a drag on exports and industrial growth.
Fully Valued Stock Market – The S&P 500® Index 1 is up 229% in a bull market that is over seven years old with lofty P/E (price-to-earnings) valuations of 20x.
It doesn’t seem the current market is accounting for the challenges the Trump administration faces. The market response to the U.S. election is, in our opinion, all based on expectations, not fundamentals. Markets have also lost sight of the potential risks that radical monetary policies globally pose to financial well-being. We believe that at some point sentiment will evolve to reflect these inherent risks. It is impossible to predict the catalyst that shifts market psychology but it could come soon after the December 14 Fed rate announcement, as happened last year. Until a catalyst emerges, and as long as bullion ETP outflows continue, gold is likely to struggle. In the longer term, our conviction remains for a strong gold market.
Trump recently attacked Fed rates and even talked about trying to gain more control over the independent body. However, higher rates translate into higher borrowing costs for the housing (ITB) (XHB) and auto markets. Lower regulations on banks could lead to indiscriminate borrowing akin to the subprime borrowing crisis.
According to the Federal Housing Finance Agency (or FHFA) House Price Index (or HPI), US house prices rose 1.5% in 3Q16. On a year-over-year basis, house prices grew 6.1%. Florida, Oregon, Washington, Colorado, and Utah ranked as the top states with appreciation of ~10%. Tacoma-Lakewood, Washington, recorded a jump of 12.9% in prices among the most densely populated metropolitan areas. Out of nine US census divisions, the South Atlantic division led with a jump of 7.1%.
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According to the “Quarterly Report on Household Debt and Credit” by the Federal Reserve Bank of New York, household debt recorded quarterly growth of 0.5% in 3Q16 to $12.3 trillion, which is nearly 2.6% below the 3Q08 level. However, 4.9% of the debt was in a phase of delinquency, of which 66% was delinquent by at least three months. Though dealers managed to entice customers with attractive discounts in November, 3.6% of the auto loan balances were delinquent by at least three months. Auto loan balances recorded an increase of $32 billion in 3Q16.
According to the American Society of Civil Engineers, US infrastructure needs an investment of $3.6 trillion in the next four years. Trump’s private and public partnership plan for restructuring infrastructure could be an efficient move, considering low interest rates.
Industrial production fell 0.6% and 0.4% in November on quarterly and annual bases, respectively. The decrease was driven by a slump in manufacturing and utilities, offset by mining. The stronger dollar has had an impact on production. However, the market expects tax cuts and deregulation to help counteract the effect of the stronger dollar.
US exports could obviously be affected by the stronger dollar (UUP). Currencies in emerging markets that have lost out against the dollar should be the worst hit. Learn more in the final part of this series. The move up in valuation of the S&P 500 (GSPC) is completely in anticipation of Donald Trump’s pro-growth campaigns. We will all have to see how those plans get translated into reality once Trump assumes office on January 20, 2017.