Bob Baur
Principal Global Investors’ Chief Global Economist, Bob Baur, weighs in on Wall Street’s Trump-Slump worries and why dovish Central Banks are slow to see the global upturn.
“The U.S. and global economies hit a low point in mid-first quarter last year and cyclical stocks and bonds have outperformed their more defensive cousins from then through year end 2016. Cyclical issues are those securities that benefit the most from faster growth, good profit gains, a surge in confidence, and fading worries about deflation.
“Stock markets picked up on the potential for recovery early last year, hence the cyclical outperformance since. Bond markets saw the same possibilities and U.S. interest rates surged. However, from January this year, some of those trends have reversed; many cyclical issues have underperformed the broad market.”
Wall Street’s Trump Rally
“Some worry that the surge since the U.S. election is only a Trump rally and that stocks will tank when the expected reforms don’t occur or are delayed. But, if that’s the case, with all the problems and partisanship in Washington now, why are stocks still holding at their highs? Markets that don’t go down on bad news are good markets. Further, stock market peaks are usually associated with recessions and given the ebullient numbers and optimism, a U.S. or global recession seems quite a way into the future. So, while there was a reversal in some market internals as described above, we think it’s too early to be talking about a stock market peak.”
Markets Give the Fed a Window to Raise Rates
“With signs of the synchronised world economic upturn strengthening, global financial markets are more willing to accept the Fed’s interest-rate normalisation schedule than has been the case for several years.
“What changed? The economic backdrop, not the Fed. The Fed likely had in mind starting to normalise policy in 2015, only to see those plans undermined by a series of world economic problems. The return of a bit of inflation, faster nominal growth, and rising world profits suggest that downside risks have receded. There are clear political risks in the United States, the United Kingdom, and Europe, but there has been enough improvement in U.S. inflation and employment that the Fed is following through on its policy schedule.”
Check Europe
“Many breathed a huge sigh of relief at the election results in the Netherlands. With some uncertainty lifted from the Eurozone, the strong economic news of the last several weeks should buoy attitudes even more. Business surveys are consistent with 2% growth or more; employment is growing, and unemployment is falling.”