100 days of Trump: A look at U.S. equities now
The first 100 days
The Presidency of the United States is a tough job. As I said leading up to the election, our country was founded by a group of former rebels suspicious of government power. These suspicious founders designed a government where it is intentionally difficult to get big things done, let alone get them done quickly.
This is the reality that U.S. President Trump faced when he took office on January 20. 100 days in, his administration has a mixed scorecard to show for their efforts. And the rest of us have been reminded that governing in a democracy is unwieldly, sometimes unseemly and always a full-contact sport.
U.S. markets and economic growth
The U.S. markets have been paying close attention to the new president’s agenda and, overall, have reacted positively to those plans and their potential economic and market impacts. For example, in the first three months following the election, interest rates on 10-year U.S. Treasuries yields climbed nearly 80 basis points (bps) to 2.63% according to Bloomberg as of March 13 on the expectation that a stronger economy would create greater inflationary pressure.
Economic growth expectations increased sharply, as evidenced by the strength of business surveys like the ISM Manufacturing Purchasing Manager Index on April 3, 2017, as well as CEO1 and consumer confidence surveys2. Paired with improving global economic data, this confidence pushed the U.S. and global stock markets higher and higher as shown with the MSCI World Index year-to-date return up 6.38% as of March 31.
As the Trump administration’s policy challenges have grown, however, U.S. markets are becoming more skeptical. As of March 31, the S&P 500®(up just 0.12%), indicating that the U.S. equity market was effectively flat in March. Yet, for the same time frame, non-U.S. developed market equity indexes, such as the MSCI EAFE (up 2.75%), and the MSCI Emerging Markets Index (up 2.65%) continued to move higher. Back in the U.S., 10-year interest rates have fallen3 and the dollar has weakened4.
Is it time to be skeptical? Looking at the markets alone, we agree with a more skeptical view with regards to U.S. equities. This is not a judgment that the President will fail relative to history, but rather a simple understanding of the system, as it was designed—an understanding that recognizes these truths: It’s hard to get things done in our government.
Our view for U.S. equities
Here are the fundamentals for U.S. stocks, from our perspective, as noted in our Global Market Outlook- Q2 Update:
- They are very expensive, both relative to other stock markets and relative to their own price history.
- Earnings growth from the U.S. will be modest. We expect U.S. earnings growth of about 5% in 2017, while the Institutional Brokers Estimating System consensus is expecting 10.1% growth for the S&P 500® as of 24 April. We expect higher earnings growth out of other stock markets (notably Europe and emerging markets).
- We also believe that the economic growth rate for 2017 will be roughly the same as it has been for the last seven and a half years – roughly 2%
We are concerned that many market participants are too optimistic in their expectations for the economic impact of the Trump administration in 2017, as Kara Ng noted recently. We believe the optimism—that U.S. government policies can create a significantly better economic and market environment in the near term—is likely misplaced.
As we focus on the fundamentals of U.S. stocks, we see a different story unfolding: The U.S. equity market is vulnerable to a correction in the not too distant future.
That said, even if that correction were to occur, as noted before, we don’t believe that a recession is likely. So, that correction would likely be limited and very likely would represent a buying opportunity for investors. Until then, or until the essential facts change, we remain underweight U.S. equities.
1 The Conference Board. CEO Confidence Survey. April 6, 2017.
2 University of Michigan. Consumer sentiment survey. April 2017.
3 YCharts. 10 Year Treasury Rate. Three-month history as of April 13, 2017.
4Trading Economics. US Dollar History. January 1 – March 31, 2017.