What a way wrap up 2016 in the markets. Stocks around the globe continued their march higher in December with small cap stocks outperforming large cap, international and emerging market stocks. The US dollar index also extended it’s rally over the previous month against most major currencies. Dow 20,000 was within reach but the index didn’t quite make it there. We’ll have to wait until at least 2017 until we see that level broken. As we remarked last month, the markets appear to be pricing in a lot of pro growth/pro inflation policies in the U.S. due a Trump administration. There’s been a lot of speculation, but we’re getting very close to finding out what policies will be proposed and ratified.
Making international news, Italy’s PM Renzi resigns after the country voted not to expand the PM’s power and weaken governmental checks and balances. They also appear to be bailing out one of their oldest and largest banks due to too many bad loans on their balance sheet. Because of the size of the country within Europe, Italy has the potential to destabilize the EU and the Euro. John Mauldin has long said that we’ll find out if the Euro is a currency or an experiment. 2017 may bring us closer to finding out. Although in the meantime, The European Central Bank expanded its quantitative-easing program to exceed 2.2 trillion euros ($2.4 trillion) by the end of 2017, buying at a reduced monthly pace with the caveat that it can step up or prolong purchases if needed. Russia and other non-OPEC nations joined together in rare and coordinated effort to reduce crude output. The agreement reached calls for non-OPEC members to reduce output by 558,000 per day. I imagine this is a big benefit for US frackers who can quickly ramp production while using derivatives to hedge against another drop in the price of oil.
Trump’s focus on China as being a currency manipulator and benefiting from poor trade deals has been one of the things we’re expecting to see in the form of legislation. Hedgeye Risk Management had an interesting take in the daily note to clients on 12/28 which we’ve highlighted a piece of here:
“To the naked eye of a less-informed populist like Trump, the U.S.’s disadvantage comes across as the result of bad trade deals and unfair trade policies on the behalf of the Chinese government. From our vantage point, that’s only half true at best.
Firms all across Wall Street and beyond are still trying to figure out what a Trump presidency means for US growth. We’ve seen inflation and growth expectations increase fairly substantially since the election. Even Steven Schwarzman of Blackstone is talking up the potential for the U.S. economy…
John Mauldin had a great update in mid-December on current market valuations and his thoughts related to Trump. You can read that update here: http://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/161211_TFTF.pdf
A FEW QUICK CHARTS
Part of Trump’s tax proposal is that intermediate imports won’t be able to be deducted for US corporations. It means that American jobs depend on turning these imports into finished products. If companies have to pay higher tariffs or are unable to offset the cost of these imports against their income for tax purposes, the outcome could be messy.
This chart below shows the top trading partners for the US and other countries that might be affected by trade policies going forward.
Consumers appear to be more confident and something Trump can certainly claim (and has). It’s too early to tell if this will translate into higher retail sales and consumer purchases. Currently, retail stocks have been weak and underperforming the broader rally in stocks.
We’ll releasing our Q4 Macro Views walk through in the coming weeks which we’ll highlight these topics (amongst others) in much greater detail.
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