• Trump Rally: Initial sell-off of global equities (-5% in Asia and futures markets) reversed on retaining Senate & House = Clean sweep. Trump anxiety gives way to a post-gridlock optimism.
• Stronger growth + higher inflation = Higher nominal rates & a stronger US dollar. Directionally correct, but the market (as usual) has overreacted to the initial news.
• Infrastructure spending is only a short-term economic boost (offset by deficit & higher rates) unless it can target long-term productivity gains. It’s not how much you spend, it’s how effectively you deploy it.
• A race to growth: Can infrastructure spending, lower tax rates, and deregulation promote growth before Trump’s shortcomings (China trade war? Twitter war? Russia? Immigration?) derail the economy?
• More growth AND more uncertainty: Wider dispersion of market outcomes; less confidence in market outlook. Volatility and dispersion: Security-specific alpha begins to displace macro-driven beta.
• UK economic data remains reasonably robust but doesn’t reflect the adverse realities of a potential “hard Brexit” on the horizon.
• UK government caught in limbo between illustrating a coherent Brexit plan and revealing it’s negotiating tactics too early.
• Recent calls for UK to utilize its leverage are misguided. Negotiation is more likely about what the EU can do and less about what it wants to do. Something has to give: Market access? Movement of people? Budget support?
• A cartel requires internal cooperation among entities and some control over production and/or prices. It isn’t clear that OPEC meets either of these criteria today.
• Saudi Arabia tried unsuccessfully to break U.S. shale oil production through excess supply. Ironically, it’s U.S. shale oil production that is breaking down OPEC and Russia. An industrial example of technology leading to disruption.
• Vienna OPEC meeting has low chance of meaningful agreement. Fears of “peak demand” have created a use-it-or-lose-it mentality with few member countries willing to cut. Some price rebound likely on vague references to “coordination” but real output cuts or meaningful limits unlikely.
• Long term global supply/demand equilibrium near $55-65/barrel on WTI; trending that way in 2017-18.
• Expect the US Fed to raise by 25 bps at the December FOMC meeting; A hike is highly likely but not guaranteed (as market is pricing 100% implied probability). Still 2+ weeks of volatility between now and the FOMC meeting.
• With a rate hike likely (as of now), focus will turn to the statement and forward guidance. Two additional hikes in 2017 priced into Dot Plot and futures prices. Statement is likely to reiterate this view.
• Full employment: Strength of labor market not in question and wages are rising.
• Price stability: Yellen’s preference is to let inflation “run a bit hot” but look for signs that Post-Trump inflation expectations may force the Fed’s hand.
• Low-to-negative sovereign bond yields remain unattractive as they are predicated on artificial policy stimulus. Without further economic deterioration (not our base case), returns will be limited at best.
• Post-Trump back-up in rates in the U.S. (and globally) makes high quality sovereign bonds “less terrible”
• Buying negative yielding bonds might be a great short term trade (with the ECB or BOJ acting as the “greater fool”), but it’s a terrible long term investment.
• Lower quality corporate bonds (like high yield or bank loans) offer attractive relative value (average spreads) if not absolute value (yields remain below historical norms due to low base treasury rates)
• Globally, equity valuations remain elevated but not extreme. Rock-bottom interest rates are supportive of higher-than-normal valuation metrics, but P/E expansion will be limited at these levels
• U.S. earnings growth (S&P 500) should return in Q4 and into 2017, but growth rates will be mid-single-digits, consistent with nominal global growth. Trump-induced growth won’t materialize until 2018 earnings.
• Somewhat stronger U.S. dollar favors small caps (lower trade/currency headwinds vs. large caps) and Non-US stocks (export competitiveness and currency translation effects)
• Stocks offer attractive relative value with bond yields so low, but absolute value is not broadly compelling at current valuations
