Is Trump Pivoting Center Right?
Despite the plethora of economic, political and company specific news last week, the key event that may trump everything else may be the shake up at the White House – the removal of Reince Preibus as Chief of Staff and the appointment of John Kelly, Head of Homeland Security and former four-star Marine General.
The dismissal of Stephen Bannon is probably not far behind which will bring an end to the obstructionist and isolationist wing of Trump’s inner circle. I mentioned some months ago that these two gentlemen should go and let the more centrist, even liberal, wing of Trump’s inner circle run the show, as it was really the only way that Trump’s agenda could be passed. The country works best from the center right rather than from extreme right and left positions. Kelly was not a supporter of Trump but will bring order and cohesion where there has been chaos, discord and incoherence. “Loose lips sink ships” won’t happen under his watch.
Here’s a few of the key things that happened last week:
- Second-quarter GNP accelerated to 2.6% as anticipated led by a gain of 2.8% in household outlays (Consumer Confidence is near a 16-year high); business-fixed investment rose 5.2% after an even larger gain in the first quarter, and net exports improved. On the other side of the ledger was a slight decline in government spending, weakness in residential housing and a reduction in inventories which really is a positive for growth ahead especially if demand holds up as we expect. The PCE, which the Fed monitors closely, rose only 0.3% in the quarter while core inflation rose only 0.9%. The other key matrix for the Fed is the employment cost index which rose only 0.5% and is up only 2.4% over the last year.
- Reported second-quarter earnings continue to beat previous estimates. Managements are generally raising at least the lower end of their projected earning for the year while remaining cautiously optimistic for the future. The key numbers for me were that orders are accelerating, prices and operating margins are rising, and cash flow.
- The Fed met this week and not surprisingly did not alter policy at this time. Particular attention was focused on beginning the slow reduction in the balance sheet and on inflation, which continues to surprise to the downside. We believe that the Fed will not alter policy until there are visible signs that low inflation is not transitory. The Fed as well as other monetary bodies in the world are all in the same boat and will stay one step behind fearing a slowdown in economic growth and deflation more than an acceleration in growth and inflation. All good for financial assets.
- Prospects for tax overhaul improved last week as the border tax was officially killed which was the major impediment for gaining broad support for any plan. Tax relief is clearly now the number one priority of this administration and Republican Party who need a victory big time for their constituents. We maintain that the corporate tax rate won’t fall beneath 20% and the wealthy will not get any tax relief but there will be improvements to capital gains/investment and estate taxes. Healthcare reform is now on the back burner until both parties can come together on any overhaul of the existing plan.
- Growth in the Eurozone continued to improve as economic sentiment hit a 10-year high. Preliminary numbers for second-quarter output will be announced Tuesday and will show a significant bump up from the first quarter. Even industrial output in the UK remains surprisingly strong.
- Chinese President Xi Jinping gave a major speech last week as a preview before the party convenes to discuss its five-year plan later in the year. He is committed to supply side economics, slashing industrial overcapacity while bringing down pollution, and reducing over all debt and leverage in the economy. I remain favorably inclined to consumer/technology long-term investments in China.
- Japan’s business confidence index hit a multi-year high last week along with forecasts of increased spending plans on plant and equipment as well as increased hiring plans for additional employees.
- Industrial commodity prices along with oil hit multi-week highs last week reflecting growth in demand and curtailed production resulting in declining inventories, which bodes well for future pricing. Saudi Arabia’s upcoming public offering of Aramco stock and bonds is a key driver in their effort on restraining production and boosting prices. We still expect growth in non-OPEC sources and alternate energy sources will keep a lid on future oil prices. Jaguar will only manufacture electric cars in a few years, and England will ban all gasoline vehicles in 20 years.
So where does this leave us?
It is clear that the global economy continues to improve without normal inflationary pressures. Interest rates remain unusually low for this stage in an economic recovery while earnings are accelerating as anticipated benefiting from improved volume, pricing, reduced operating costs and higher margins. Again, all of this is a great recipe for higher stock prices but all stocks are not equal and sometimes expectations run ahead of reality. I found it particularly interesting last week that many stocks sold off after beating earnings estimates after having reached all-time highs. This is not unusual, so don’t worry. The key is the future; and if it is indeed bright for many of these companies as we expect, this to be only a pause in a long-term uptrend.
We continue to emphasize in our portfolio the financials, mainly multinational banks; global industrials; low-cost industrial commodity stocks even though they hit multi-year highs last week; U.S.-based, low-cost steel and aluminum companies even though Trump may have delayed implementing trade tariffs against dumping in the states but it will come so be patient as it is for real and global prices are rising as China is finally curtailing production as mentioned above; global technology companies selling at a reasonable valuation to growth; and special situations emphasizing companies implementing internal changes to be more competitive and profitable in the future.
Let’s conclude where we began and discuss the implications of Trump pivoting from extreme far right positions supported by Preibus and Banyon to the center right supported by his Wall Street team and family. The odds for passing a tax reform bill this year have risen dramatically as well as a huge infrastructure program. As we move into the fall, we expect the market to again anticipate a “Trump trade” which really has evaporated over the last few months. Trump and his team will continue to push for free but fair trade but may not have to act as punitively if countries/companies act first as we see already occurring in China.
The bottom line is to look at what happened after election for a clue for what may happen this fall. Don’t try to market time but invest for accelerating domestic growth as we enter 2018. Our portfolio is well positioned not only the current environment but for this occurring as well.
So remember to review all the facts; pause, reflect and consider mindset shifts; analyze your asset composition and risk controls; do independent research and….
Paix et Prospérité LLC