In the wake of Donald Trump’s election, many attributed Industrials stocks’ rise to expectations for increased US infrastructure spending—one of Trump’s big campaign promises. However, that doesn’t make it wise to pile into infrastructure-related sectors solely based on Trump’s pledges. It’s still too soon to say exactly what the administration focuses on as the new president formally takes the reins, but expectations for an outsized infrastructure impact have likely outpaced reality.
Already moderating his promises a bit, Trump has lowered his infrastructure spending plan from the campaigned $1 trillion to $550 billion—roughly 3% of GDP. Now $550 billion worth of spending could be impactful if spent all at once (and presuming it didn’t crowd out private investment in the process). However, it’s likely spread out over many years—muting its stimulative power—and probably wouldn’t start until 2018, just in time for midterms. It’s also unrealistic to expect an infrastructure bill—or any bill— to pass through Congress undiluted or without bringing up other political landmines like raising taxes or deficit spending. In other words, there is a lot of potential for gridlock to get in the way.
Updating infrastructure has benefits, but the economy doesn’t need a massive infrastructure bill to keep growing—the private sector has done fine driving most of the growth this expansion. Past infrastructure spending bills haven’t moved the needle because they require years of planning, and spending typically gets bogged down across myriad national government agencies—not to mention conflicts with state and municipal needs. Consider the 2009 American Recovery and Reinvestment Act, which lacked readily available projects and drove little meaningful revenue for Industrials companies. And 2015’s five-year, fully funded (by the Fed’s dividends) $305 billion Highway Bill has thus far had a muted effect, going almost unnoticed.
|By Fisher Investments Editorial Staff, 01/19/2017|
In this podcast, we talk to Content Group Manager Todd Bliman on how investors can navigate the modern financial news media.
There’s more where that came from. Photo by yodiyim/Getty Images.
At long last, the Organization of the Petroleum Exporting Countries (OPEC) reached an agreement to cut production on Wednesday. While details are scarce, comments from oil ministers indicate the group will cut oil production to 32.5 million barrels per day (Mbpd), from recent levels of 33.5 Mbpd. Despite the hype, however, the change is basically window-dressing. It probably won’t much alter global supply or improve the outlook for Energy firms. Their earnings are tied to oil prices, which likely remain lackluster for the foreseeable future (albeit with short-term volatility).
This is OPEC’s first official action of this sort since oil began crashing in 2014. OPEC surprised markets that November by declining to cut production, as had been widely expected at the time. Oil supplies were growing briskly, primarily due to new output from US shale production, which got a boost from developments like horizontal drilling and hydraulic fracturing. The resulting oversupply led to the last two years of oil weakness. With Wednesday’s agreement to cut production, OPEC is arguably moving back to its traditional role of attempting to target a price range for oil.
In a year where populism has swept the ballot box, is Italy next? On December 4, the country will hold a referendum on whether to reform the size, powers and appointment process for Parliament’s upper house, the Senate. If the referendum is approved, the Senate’s powers would be greatly curtailed and size reduced. It would shrink from 315 members to 100, the government would no longer have to win a Senate confidence vote, fewer measures would require Senate approval and senators would be appointed by Italy’s Regional Councils instead of directly elected. If passed, it would foster government stability and make it easier to pass badly needed reforms. But if it fails, many fear it will destabilize Italy’s pro-euro government, potentially propelling anti-euro populists to power and raising the risk of a domino effect across the eurozone. In our view, however, fears of broader market impact are likely overstated.
Prime Minister Matteo Renzi proposed the referendum to mitigate the Senate’s ability to block legislation and increase the Italian government’s stability, through elimination of one confidence vote. However, he also indicated his government will step down if the referendum is defeated. Opposition parties, such as the Five Star Movement (M5S), are against the referendum, as they believe it gives too much control to the Prime Minister. Many believe a Renzi resignation could give M5S an opening to enter the national government.
Italy doesn’t allow the publication of polls 15 days prior to an election or referendum, but the last polls indicated the “No” vote was ahead by about three points. PredictIt, a betting website similar to the late, great InTrade, puts the odds of the “No” vote prevailing at ~80%. But as US elections and the Brexit vote showed, polling and prediction have been unreliable lately. The considerable number of undecided voters (~20%) also suggests any poll isn’t conclusive.
A few months ago, 10-year Treasury yields hit an all-time low of 1.36%, as investors piled into Treasury bonds in the wake of the Brexit vote.[i] Since then, Donald Trump’s win and expectations for higher inflation have sent yields up 70 basis points (0.70%).[ii] As rates have risen, so have fears about the end of the alleged 35-year bond bull market—and the possibility of a bond bear market, should rates climb higher. Since bond prices and interest rates move inversely, many seemingly fret higher rates mean bonds are doomed to poor long-term returns—arguing bondholders should ditch them post-haste. In our view, this overlooks important nuances suggesting the case for investors who need fixed income exposure hasn’t changed.
First, let’s look at the last 35-ish years of yields—that long-term bond bull. Fast-rising inflation and aggressive Fed rate hikes pushed 10-year yields to 15.84% in 1981. But after the Volcker Fed put inflation in check, rates began a secular move downward to recent lows. However, this wasn’t a straight line down.
As Exhibit 1 shows, bond yields went through several cycles where yields increased. Since 10-year US Treasury yields peaked in September 1981, rolling 12-month yields rose 35% of the time.[iii] Even if yields do experience a long-term climb, odds are investors will see plenty of periods where yields fall. Having an actively managed fixed income strategy can help take advantage of these opportunities.
With oil up from its most recent low, many see a prime opportunity in Energy stocks. However, despite oil’s nascent rebound, the bigger picture hasn’t changed. The primary headwind facing Energy is an oil oversupply, which puts downward pressure on prices. Even if prices don’t plunge anew, this force still impacts the sector’s future profits. For investors, the question isn’t, “how much have prices risen recently?” Rather, it’s, “are there any meaningful supply constraints that will alleviate pressured profits?” All evidence today suggests there aren’t, making it premature to load up on Energy stocks.
Demand growth likely remains steady, as it has since 2012, but supply probably won’t abate any time soon. Domestic producers are quick to bring supply back online at the first signs of price strength. As seen in Exhibit 1, US producers have responded to stronger oil prices by putting rigs back to work, with a narrow lag time of only three months. In many shale regions, new wells are profitable with oil at $40 a barrel, according to estimates by ConocoPhillips. Indeed, the abundance of US supplies—accessible at ever-lower costs—led ExxonMobil CEO Rex Tillerson to refer to domestic shale as a source of “enormous spare capacity,” which has visibly changed the industry. That quick producer response and abundant supply dampens the likelihood oil prices significantly rise over the next 12-18 months.
Exhibit 1: Rig Count Response to Oil Prices
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|By Staff, Reuters, 01/23/2017|
MarketMinder's View: In one of his first acts as president, Donald Trump formally pulled the US out of the Trans-Pacific Partnership (TPP), the 12-nation free-trade agreement that, if approved, would have reduced trade barriers and tariffs for roughly 40% of global GDP. Though it’s today’s big news, we aren’t going to call this a major blow to free trade. For one, the likelihood TPP became reality in its current form at all was doubtful at best no matter who won the election. The Democratic Party didn’t support it broadly. And after trade negotiators reached an agreement last year, all 12 participating nations had to approve it too—not smooth sailing. In the US, that’s Congress’s responsibility, and the reception was cool, to say the least. So rather than introducing a new negative, this merely formalizes a long-expected absence of a positive. Though President Trump’s removal of the US means the TPP won’t include America, other countries can forge ahead or work on smaller agreements. While they lack the hype of TPP, they are still quite beneficial for the global economy. And before one gets carried away with the theory American protectionism is rising, consider: Trump’s spokesman repeated the long-held statement today that Trump supports trade but is against multilateral deals that are difficult to enforce. Take that as you will, but it highlights the fact that looming trade war claims are premature. For more, see today’s commentary, “Trump Executes TPP.”
|By Aaron Kuriloff, The Wall Street Journal, 01/23/2017|
MarketMinder's View: We’re ambivalent toward this piece. It starts from a pretty confused place: That high volatility and big daily dispersion between stocks is “good” for stock pickers. That may seem to make sense, but in reality, dispersion and volatility aren’t relevant to stock pickers’ success because it isn’t about one day’s movement—that’s the myopic territory of day traders. That said, this article does unwittingly illustrate three important points: The observation that daily “big” stock movements (defined as double-digits, in the neighborhood of 15%-20%) are less frequent today compared to a long-term rolling average suggests increased market liquidity is reducing volatility, contrary to those who have harbored suspicions over high-frequency trading in recent years. Two, the whole report highlights the fact most similar stocks will move similarly. While stock selection can make a difference, it is overall less important than weighting the correct sectors, styles, sizes and countries. Finally, the conclusion more sensibly notes that, “the best way to deal with sudden, violent swings is to ignore them.” We wouldn’t suggest outright ignoring the activity—if you own the stock, you’d probably be interested in the “why” behind the big move—but emotionally reacting and selling is never a prudent investment action.
|By David Greenberg, The Wall Street Journal, 01/23/2017|
MarketMinder's View: A very interesting trip through history that makes the point: It has never been as easy as many presume for presidents to cram through their agenda, even with significant party support. President Trump seems likely to face the same and potentially much higher hurdles. As this article opines, “What about Donald Trump? He may well end up tangling as much with his own party as with his Democratic opposition. In his campaign, he badmouthed or alienated most leading Republicans in Washington, and though some wounds have been patched, many more still fester.” Eleven Republican Senators never endorsed him. “Mr. Trump lacks, too, not only the overwhelming majorities that would insulate him from some intraparty dissent but also the leadership qualities that his most successful predecessors exhibited. He has neither Wilson’s deep understanding of government, nor Roosevelt’s easygoing charm, nor Johnson’s years of experience mastering the byways of the Senate.”
|By Satyajit Das, Bloomberg, 01/23/2017|
MarketMinder's View: There are a whole bunch of inflation-related misperceptions here. While this piece sensibly doubts President Trump’s ability to spur lasting inflation through fiscal stimulus and tax cuts, it layers on its own misconception: that because demand (in the form of consumption and investment) is so weak, the US could enter a deflationary spiral, in which consumers refrain from spending in the hopes of lower prices—begetting a cycle of weaker and weaker demand. However, the deflationary spiral is a rarity in economic history, despite being frequently feared—especially since 2009. Moreover, data show consumption and investment aren’t nearly as weak as this presumes, and forward money supply indicators are healthy. Though loan growth slowed some in Q4, it rose at a solid clip in 2016—so did broad money supply, which accelerated. Recent inflation figures have picked up, yes, but that has more to do with the negative skew of past weak Energy prices. Today, rising headline CPI figures reflect Energy’s now-positive turn. Core inflation gauges, which remove volatile inputs like energy, show prices have remained pretty steady over the past several years. So the explanation for “why inflation won’t last” is flawed, in our view, because it never truly went away—at least when you account for one-time, outsized skews.
Market Wrap-Up, Friday, January 20, 2017
Below is a market summary as of market close Friday, January 20, 2017:
- Global Equities: MSCI World (+0.4%)
- US Equities: S&P 500 (+0.3%)
- UK Equities: MSCI UK (-0.1%)
- Best Country: Sweden (+2.0%)
- Worst Country: Australia (-0.7%)
- Best Sector: Telecommunication Services (+0.9%)
- Worst Sector: Health Care (-0.2%)
Bond Yields: 10-year US Treasury yields remained at 2.47%.
Editors' Note: Tracking Stock and Bond Indexes
Source: FactSet. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.