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December 2016 Update

By January 4, 2017No Comments

 Market Scorecard


 Monthly Commentary

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.

Specifically, the U.S. doesn’t have a series of bilateral issues with China and other key trading partners; in 2015 it ran trade deficits with 101 countries. One hundred and one. The broad-based nature of our bilateral trade deficits is not likely to be the result of “bad deals” or “unfair practices” as Trump and his national trade team have repeatedly suggested.
Rather, it’s more likely the result of a country that consistently runs a net national savings deficit – it either over-consumes, over-invests or both. Countries like China and Mexico have simply taken advantage of the desire of U.S. consumers to over-consume insomuch that large multi-national companies have taken advantage of cheap, surplus foreign labor by offshoring production in pursuit of higher profit margins. The evidence in support of this conclusion is overwhelming to say the least.”

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…

“The changes as a result (of the election) are going to be very substantial in many areas, but particularly in the business community and the financial area. You’re going to have a very substantial reversal in regulations of all types…. if you look at the architecture of the financial world, it’s going to change very substantially…. this is as big a change happening all at once — I’ve been in finance for, I don’t know, 45 years? This will be the biggest…. When you have changes like this that are so profound, it’s going to drive higher GDP. It’s going to make the US a more friendly place for foreign capital. And it’s going to have significantly accelerated growth not just for financial institutions but for the country as a whole….So, this is like very important. It’s very important. And it’s not just about some stocks for financial companies, although that would be a nice thing. It’s much bigger and more impactful over a much longer period of time.”

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:



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.

If you have any questions please contact us directly.  If you’re interested in a topic that you’d like us to address, please email us so we can include them in future updates.


Best Regards,

Jared Toren
CEO & Founder


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