121 Barron's - Making U.S. Stocks Great Again

Overview

• Shareholders owe a debt of gratitude to Trump as Dow approaches 20K (in reality a number with little meaning)
• US equities have grown in value by almost 7% since the election
• This all reflects perceptions and expectations, not yet realities
• This is a “hope and faith based rally”
• The outlook for growth and inflation shouldn’t change anytime soon since fiscal policy won’t change until next year at the earliest
• Regulatory changes that can be implemented by executive order would be the most immediate and potentially most powerful changes
• For the markets, this means more mediocre global growth, subdued inflation, tamped down volatility, more accommodative monetary policy from central banks
• Even so, the “animal spirits” of investors have been aroused
• The boost from a Trump presidency may be bigger for main st than wall st
• Berezin from BCA Research things that rising protectionism my hurt global economy, the effect on US will likely be modest since we’re a relatively closed economy. Exports are only 12% of GDP.
• Doesn’t makes sense for China or Mexico to put up barriers w US since it would hurt their jobs
• According to Berezin, Trump’s tax cuts would offset any new tariffs and/or new tariffs would shift sales to domestic producers which would boost employment. In this way, tariffs would not hurt capital investment, domestic producers may have to boost spending to bring production back to US
• BUT trade agreements are also about politics and protectionism may benefit US at expense of other nations. This could lead to international breakdown.
• Of note: China, South Korea, Vietnam
• S&P 500 profits may not benefit from tax cuts as much as many think since effective tax rate is already 25%, much lower than statutory rate of 35%.
• As for infrastructure spending, likely not that many projects that are “shovel ready”
• Doug Ramsey from Leuthold Group thinks the current market momentum and sentiment could carry things for 4 to 6 more months
• As for interest rates, Fed-funds futures are pricing in two .25% increases for 2017. Probability of being at .75-1% by June is 50+% and 1-1.25% by Dec at 50+%.
• Continues to be heavy liquidation in US Treasuries by foreign monetary authorities
• In the last 12 months, total Treasuries held at NY Fed is down $186B to $2.8T.
• That is consistent with ongoing decline in China’s foreign currency reserves which have declined by $1T from their 2014 peak of $3T as Beijing attempts to slow/stop the decline in the value of their currency the Yuan.
• The surge in Treasury yields has not impacted the stock market negatively at this point, but some still have doubts in the ability of heavily indebted economies to absorb higher interest costs
• I’ve had two friends reach out to me for stock picks in the last three days.

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