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Monthly Market Perspective - January 2017

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Below please find a link to our monthly market perspective piece for January. This month, with the transition in Washington upon us, we reflect on what impact prior presidential cycles had on markets, and assess how this one may turn out.

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Monthly Market Perspective - January 2017

  1. 1. Market Perspective – January 2017 Experience Insight Impact biegelwaller.com Overview: While presidential election cycles can move markets materially, the impact from policy moves may take many years to unfold and in many cases are limited in comparison to what some market participants expect. With Inauguration Day upon us, we use this month to review how policy moves affected markets historically, in order to determine how markets will take shape with a new administration in Washington. 1
  2. 2. Experience Insight Impact Since the Election… • Since Election Day, the S&P 500 has advanced 6%. • So far, very little is clear in terms of actual policy changes. • Investors are optimistic that tax reform will occur. • Investors also see a better regulatory landscape. • The promise of fiscal stimulus is driving growth optimism. 2 Ten Year Treasury Yield
  3. 3. Experience Insight Impact Dollar Strength • Since the election, the U.S. dollar index rallied 6.4% to a 14 year high of 103.30. • While the recent rallies have been impressive, the dollar index, currently at 100.62, is considerably lower than the all-time high of 164.72 (reached in February of 1985 during Reagan’s presidency). • A strong dollar will inevitably hurt U.S. exporters. In other words, while we do not dismiss further dollar strength, moves such as the one since the election should normalize over time. 3 Ten Year Treasury Yield U.S. Dollar Index
  4. 4. Experience Insight Impact Rising Interest Rates • Policy moves have stoked the potential for higher inflation which in turn has bond yields surging. For instance, the yield on the 10-Year Note has risen from 1.8% to the recent high of 2.6%. • However, from a longer historical perspective, bond yields are still close to record lows. Jeff Gundlach, of Doubleline, mentioned that the 10-Year yield at 3% would put an end to the bond bull market. 4 Ten Year Treasury Yield 10-Year Note Yield
  5. 5. Experience Insight Impact Historical Perspective Initial Excitement Has Occurred Before: Oscar Shafer, of Rivulet Capital, recently reminded us in the 1/15/17 Barron’s Roundtable that, “From the time Ronald Reagan was elected in November 1980 until he was inaugurated in January 1981, the market was up 9%. It then fell about 30% through August 1982.” He is quick to point out that he is “not predicting that, but we have had a lot of euphoria.” Presidential Prowess and Cabinet Do Not Necessarily Correlate with Economic Growth: Scott Black, of Delphi Management, was quoted in the same Barron’s article: “The Wall Street Journal published an interesting article recently showing that presidential administrations whose appointees have a lot of experience, especially in business, don’t always produce the strongest economic growth. The Kennedy administration’s top officials had the least amount of experience, but the highest growth rate of per-capita GDP, at 4.2%. Reagan and Bill Clinton had more people with experience, and GDP rose 2.5%. The administrations of George H.W. Bush and George W. Bush had people with the most experience, but posted the worst growth, at 0.7% to 0.8%. While Trump might do good things like deregulate parts of the economy, there is no guarantee that America is going to return to an earlier, more robust growth rate.” 5
  6. 6. Experience Insight Impact Presidential Power Limits A recent NY Times article by Neil Irwin has several additional nuggets of wisdom: • “Presidential economic records are highly dependent on dumb luck where the nation is in the economic cycle.” He points out that the President has “no control over the demographic and technological forces that influence the economy.” • He continues, “Even in areas where the president really does have power to shape the economy — appointing Federal Reserve governors, steering fiscal and regulatory policy, responding to crises and external shocks — the relationship between presidential action and economic outcome is often uncertain and hard to prove.” • Fiscal Policy requires Congress. “Presidents can set direction, but not steer the ship themselves.” • Timeframe is important. Irwin argues several examples, “The downsides of regulating banks poorly might show up as a crisis a decade down the road. The benefits of better infrastructure will tend to show up over many years. The payoffs of well-designed education policies come to fruition as young people enter the labor market with better skills years later.” Irwin concludes: “None of this means that presidents can’t do a lot to make the United States economy more dynamic and productive. It’s just that doing so could take a great while. It’s hard to prove that this or that policy was the source of the good times. In the short run, all those other factors have a more direct, measurable effect in shaping whether a moment in political history produces an economy we remember fondly.” 6
  7. 7. Experience Insight Impact Tax Reform is Critical While the nature and amounts of tax reform are highly uncertain, the wide expectation is that this could be a crucial step for future earnings growth. According to Barclays, tax reform on its own could add 15%+ to S&P 500 earnings. A wide range of companies will likely receive at least some benefit from broad tax reform. 7
  8. 8. Market Perspective – January 2017 Experience Insight Impact biegelwaller.com Conclusion: With a new change in leadership, it is important to maintain a proper perspective. While there are potentially growth-enhancing measures that market participants have assumed, the implementation and affects will likely take time to impact our economy. Over the upcoming months, we will monitor the policy moves that may shape the long-term growth prospects, which may in turn affect global markets. 8
  9. 9. Experience Insight Impact Disclaimer Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 9

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