January 27, 2017 Patrick Oliver-Kelley

Navigating a Fed tightening cycle, a divergence between economic and profit performance, and significant patience with respect to a rollout of fiscal stimulus, forgetting international relations for the moment, will be critical drivers to equity performance in the new year. We expect the dollar to remain firm based on the relentless widening in interest rate differential and policy divergence with the rest of the world.

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President Trump’s ‘black’ inaugural speech highlighted that he has not tempered his “America First” policy prescription, and policy uncertainty has increased again. His agenda is still a moving target, but three key risks have emerged for financial markets.

  • First, a border tax could see a 10% rise in the US dollar. It would also be bearish for global bonds and emerging market stocks.
  • Second, Trump also has his sights set on China. And China has recently been publicly bearing its teeth, especially as regards the South China Sea. Investors seem to be under-appreciating the risk of a trade war, not to mention a possible real war.
  • Third, the plan to slash Federal government spending could completely offset the fiscal stimulus stemming from the proposed tax cuts and infrastructure spending.

The good news is that the major countries, including China appear to have entered a synchronized growth acceleration. There is more to the equity market rally to come. The global profit recession is over and the rebound has been even more impressive, than could have been expected. So long as the US protectionist policies do not derail the growth acceleration, corporate Earnings Per Share, world-wide will continue robust.


The Fed will raise rates three times this year. The Bank of Japan will continue to target 10 year JGB yield of 0%, but the ECB will begin hinting at another tapering in the fall. US policy is very fluid, but for now the new administration has boosted confidence and thereby reinforced a global cyclical upswing. As long as protectionist policies implemented this year do not unduly undermine US growth, then stocks will continue beat bonds by a wide margin.

However, one additional, cautionary, thought:
The Bulletin of Atomic Scientists moved the hands of its Doomsday Clock forward by 30 seconds to two and a half minutes to midnight, in response to Trump’s ‘unsettling and ill-considered’ comments about the use of nuclear weapons, growing concerns over North Korea and worries about relations with Russia. This is the closest the clock has been to midnight since 1953.

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