Experiential Wealth, Inc.
Experiential Wealth, Inc.
Experiential Wealth, Inc.


Quarterly Market Commentary – Q4 2016

Jan 28, 2017 | Individuals, Institutions, Plan Sponsors, Quarterly Commentary

Executive Summary

Since Trump’s presidential victory in October, there is excitement and hope on the one hand and fear and disbelief on the other. The way forward has not been so uncertain for some time. The uncertainty and confusion is not only due to the change in the administration but that change is happening at breakneck speed and broad. Moreover, what has been deemed as settled and reliable are being turned upside down and questioned. It is a form of sensory overload that brings more questions than answers. Governance may be going through a period of trial by error or trial by fire. The single word that investment professionals and macro economists can agree on is uncertainty.

  • Steady and Upwards – The U.S. economy remains on solid footings with consumers continuing to lead the expansion. Labor economy remains a bright spot with steady new job creation and lowering unemployment trends; even though some slack and low labor participation rate remain. Job opening is back to pre-crisis high.
  • Disinflation to Reflation – Healthy signs of wage and job growth-led consumer demand will likely push inflation higher, and the risk of disinflation and deflation may be behind us. There are also signs of global reflation. Depending on the timing, scale and scope of U.S. fiscal and structural (tax and deregulation) changes, there could be a greater inflation surprise to the upside that would force interest rates to rise much faster and lead to market corrections, fixed income losses and ultimately recession in the next few years – more uncertainty.
  • Printing Money to Borrowing – The U.S. has solely relied on the monetary policy since the Great Recession to stabilize and push the economy forward. The effectiveness of extraordinary monetary policies is ending and the much needed addition of the fiscal policy and structural reform may be around the corner as promised by the Trump Administration. Even though the legislative branch is controlled by Republicans, there is no certainty that Trump will get his way as the year goes on. Trump promises to “drain the swamp”, and it is the same swamp that he needs to bath in to move forward – more uncertainty. 
  • Status Quo to Disruption – Donald Trump was elected to bring changes to the political system and to the country. He has demonstrated a new brand of leadership that is uncomfortable for many. Trump is a lightning rod for change, may it result in creation or destruction – more uncertainty.
  • Order to New Order – Political risk is rising with unknowable outcome and effect. Brexit and the election of Donald Trump are just two 2016 examples of rising Right Wing populism and economic nationalism that the world has not witnessed for generations. Geopolitical tension and breakdown of reliable alliances are on the rise which impacts financial markets. The challenge is that an inward looking America will, in the long run, be negative to our and the global economy and, at the same time, create a political vacuum for China and Russia to fill. The U.S. could be giving up its supremacy and influence at a time when Trump is trying to Make America Great Again – more uncertainty.
  • Globalization to De-globalization –Globalization over the past thirty years has lifted millions from poverty and raised living standards globally. It has been net positive for the world, but it also displaced jobs and security for many as the economic pie shifted. This gave rise to income and wealth inequality globally at a time when machines are beginning to compete with humans for jobs. Although understandable and, perhaps, necessary to remind leaders that change is needed, Populism is one manifestation of the frustration and push back against the status quo, but the answers are often reaching back to the past instead of leaping forward to the future – more uncertainty.
  • The Double Edged Dollar – Trump’s fiscal and structural policy success will push the dollar stronger further which would over time dampen our exports (and cause inflation). This would further support Trump’s narrative of unfair trade (increasing trade deficit) and strengthening his case for economic nationalism or de-globalization – more uncertainty.

To continue reading the full Q4 2016 Market Commentary, click here.

 


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.