Travels in the USA
Steve Merlicek, IOOF Chief Investment Officer
I recently spent a week in Washington DC meeting with a number of economic strategists and think-tanks. The hot topic as expected was Donald Trump and his policies. The consensus that emerged was that it would be difficult for him to get anything through Congress – despite Congress being dominated by the Republicans. As one Republican said, he is a tenant in the White House that can’t be evicted. With record low popularity for a new President, the inability to get legislation through Congress (the recent win on healthcare could be an exception – though still has to pass the Senate) and what many would characterise as irrational behaviour – all seems a recipe for disaster.
Despite the above, the Dow has rallied nearly 20 per cent since his election, business and consumer confidence is high, corporate earnings good, unemployment low, various positive forward-looking indices are good (such as the US ISM Purchasing Managers Index). Various other indicators such as retail sales and first quarter GDP are not so good and the latest consumer confidence figures have come off.
Listed equity markets and many other asset classes are at elevated levels. This largely is a result of the Fed’s policy since 2008, as it has dropped interest rates to historical lows and expanded its balance sheet (quantitative easing). It has expanded its assets from $800 billion pre crisis to $4.5 trillion now. The Fed’s policy since 2008 has been to increase risk taking to get yield and to inflate asset prices – which it has been very successful at.
The other discussion point was geopolitics, be it North Korea, China, Syria, Russia and so on. Whilst a lot potentially can happen on all these fronts, the markets so far have been totally uncorrelated to geopolitical events. If anything the markets are climbing the wall of worry and unless there is actually an outbreak of hostilities, it seems that the markets will ignore geopolitical events.
In conclusion, despite potentially legislative gridlock in Washington and a whole host of geopolitical events, markets are focused on other factors. It should be remembered that under Barack Obama there was gridlock and little major legislation was enacted. Despite this, US equity markets had one of the largest rallies in history.
Factors to watch going forward will be (apart from the usual economic indicators) whether Trump can get tax cuts through Congress and whether substantial fiscal stimulus will occur as a result of defence and infrastructure spending, and not to forget that the actions of the Fed will always be critical to the direction of markets.
As many of you know, Steve Merlicek will be retiring from the role of Chief Investment Officer on 30 June 2017. We would like to thank Steve for his many insightful investment articles and look forward to his continued association with IOOF as a member of the Investment Management committee.
In the next edition of Adviser News, we’ll provide you with an in-depth profile on Steve’s successor, Dan Farmer, a long-standing member of the IOOF Investment team who has played an integral role in delivering award-winning, multi-manager investment solutions.