Financial Administration in the Trump Era
The Federal Reserve will conclude its last FOMC meeting of the year in two weeks (December 14, 2016). This particular meeting will include the Committee’s release of its Summary of Economic Projections and a press conference with Federal Reserve Board Chair Janet Yellen will follow. The market is anticipating that this FOMC meeting will produce an interest-rate hike, only the second such increase in many years, coming almost a year after the other one.
The press conference will provide Ms. Yellen with ample opportunity to explain why the Fed waited so long to raise rates and why now is the right time. However, most of the questions she receives will probably revolve around two topics: (1) when is the next bump coming, and (2) is President-elect Trump going to keep her as the Fed chair? She will likely try her best to explain that she doesn’t have the answer to either question, but that won’t stop the press from pestering her with similar questions.
Therefore, the first economic headwind for the incoming Trump administration is going to be rising interest rates. After a prolonged period of near-zero interest rates, this is probably not going to be a typical rising-rates environment. There will be other obstacles to success, some that will be easily overcome, and others that will prove to be more challenging.
Trump intends to run the country like a business. He knows how to read a balance sheet probably better than any prior president did. Although he does not have experience in holding an elected office, he knows the importance of getting the right people into key positions, especially those that will shape economic and financial policies. Three of those important jobs are chair of the Federal Reserve, the secretary of the treasury, and secretary of commerce.
He has not made it clear, at least in my mind, that replacing Janet Yellen will be a high-priority task. For now, her four-year appointment runs through February 1, 2018, so she is probably safe for a year. A lot can happen in a year, so talk of her replacement, or even then need for a replacement, is probably premature at this point.
Steven Mnuchin is the nominee for secretary of the treasury. Mr. Mnuchin was the finance chair of Trump’s presidential campaign and a former partner at Goldman Sachs. He intends to make tax reform and the repatriation of corporate profits top priorities. Additionally, he believes 3%-4% annual GDP growth is both achievable and sustainable. On the regulatory side, this morning he said, “We want to strip back parts of Dodd-Frank, and that will be the number one priority.”
The nomination of Wilbur Ross as secretary of commerce raises the stature of that office. Most people, including myself, could not have told you the name of the current commerce secretary yesterday, but today I saved you the trouble of looking it up—it is Penny Pritzker. Seven different people occupied that office during the Obama administration, although four of them were acting instead of officially holding that job title. Still, the high turnover and dearth of recognizable names is additional evidence that the financial media mostly ignored the position. Mr. Ross is well-known and respected among institutional investors, and he is likely to have dramatic influence on economic policy. His goals include reducing regulation, renegotiating trade agreements, and bringing manufacturing jobs back to the United States.
All factors are now in the green, while sectors and global categories remain mixed. Financials, High Beta, and the U.S. continue to provide the leadership for their respective groups.
Financials extended its reign as the strongest sector in the post-election environment to a fourth week. Although the disparity between it and last-place Real Estate is not as drastic as the 97-point spread of two weeks ago, today’s 75-point difference is quite significant. The Industrials and Materials duo has now completed their third week in the second and third spots, indicating investor optimism toward the “smokestack” manufacturing economy. Energy had previously tucked itself into fourth place, but weakening oil prices knocked it three places lower this week. Today, a new OPEC production cut agreement is sending oil higher, laying the foundation for an Energy sector rebound. Consumer Discretionary, Telecom, and Utilities are three sectors that climbed in the rankings this week, although the small moves did not alter the larger picture, and Utilities remains in the red. All four of the bottom-ranked sectors improved their momentum scores this week, but not enough to move any of them back to the positive side of the ledger.
Momentum and Low Volatility, the only two factors in the red last week, have now transitioned to positive territory. High Beta has been the best-performing factor for about four months, but Size has strengthened and all but eliminated the gap that relegates it to second place. Dividend Growth was the only factor to improve its relative ranking, as it climbed two spots to fifth and pushed Market Cap and Quality lower. Growth is now lagging Value by a wide margin, while Yield, Momentum, and Low Volatility are lagging the field.
Two more global categories moved into positive trends, but five others remain firmly in the red. The U.S. tops the chart for the third consecutive week after wresting control from Latin America, which provided much of the global leadership earlier in the year. Canada holds the second-place spot for a second week, but Japan slipped a notch to fourth as it traded places with World Equity. Pacific ex-Japan and China were the two categories moving to green, although they are barely over the line and vulnerable to slipping back. There is a large gap in momentum scores between China and the five categories in the red. EAFE, the U.K., and Latin America held steady this past week, while there was a shift at the bottom. Emerging Markets climbed ahead of the Eurozone and pushed it to last place.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“The number one problem with Dodd-Frank is that it’s way too complicated and cuts back lending.”
—Steven Mnuchin, secretary of the treasury nominee
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