Executive Summary
- There is a synchronized global economic growth story that began after Brexit last summer and continues globally in 2017. With the stabilization of energy prices and the continuing economic recovery with years of unconventional monetary support, the world is more encouraged.
- With this backdrop, the Trump victory released a lot of pent up frustration from income and wealth inequality, low productivity and low investments, lacking fiscal stimulus, to excessive regulations. Supporters and businesses are hopeful that the Trump Administration will deliver on, if not all, many of the promises made during the campaign. “Make America Great Again” can be interpreted as many ways as there are voters, and the future is filled with hope and expectations; good sentiments follow.
- The Trump effect has carried the market through the end of April with some evidence of running out of steam. From a seasonality standpoint, we are entering a traditionally more volatile and less well performing (for risk assets) period. From a politics standpoint, the easy actions (executive orders that do not need Congressional involvement) have been taken. Thus far, with the exception of the successful confirmation of Judge Neil Gorsuch, no significant policies have been implemented. With the failed attempt on repealing and replacing Obamacare (and the inability to get the bill to the floor for a vote the second time), the Trump Administration will now be tested in the budget, tax reform, and debt ceiling (through the possible government shut down threat) negotiation. Time is not on the Administration’s side, and the proposed tax reform is so significant that many Republicans may not support.
- Backward looking or hard economic data so far tells a very different story than the soft forward looking data. Equity investors are excited about the future, and fixed income investors are worried about the lack of evidence. This gap is not sustainable, and we believe that the consumer and business sentiment will revise down significantly as the hard data slowly creeps upward in a continuingly healing economy.
- In the longer term (3 years on), the world and the U.S. still face the challenge of digitization/automation/robotics driven deflationary environment, a lack of a clear path to improve productivity that would improve income disparity and real wage growth, an aging population that limits real GDP growth along with significant debt overhang (may be even greater with new and significant fiscal borrowing) and repaying for the years of borrowing forward.
- Significant challenges remain when all major central banks begin a synchronized tapering and reverse from years of super accommodative monetary policies. The possibilities of policy mistakes and unintended consequences could be damaging to the global economy and financial markets.
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This quarterly commentary represents the current views of Chao & Company and they are subject to change. This Firm has no obligation or responsibility to update our views. The comments and views should not be deemed as Philip Chao, or any member of this Firm, offering personal or personalized investment advice. The quarterly commentary is informational only and is insufficient to be relied upon to make any financial or investment decisions or to make any changes to your financial condition.