With the spate of recent geopolitical events, we are posting weekly commentary to the Colton Groome & Company Industry News page. This most recent posting is a letter from the Investment Committee at Horizon Investments, LLC, one of our key strategic investment management service providers.
If you find this material interesting and would like to learn more about how Colton Groome & Company helps clients pursue their unique goals, please reach out to us at (828)252-1816.
13024 Ballantyne Corporate Place
Suite 225 | Charlotte, NC 28277
866.371.2399 | horizoninvestments.com
August 24, 2017
As investors, we are always thrilled to see the equity markets work for us rather than against us. However, the unending series of headline risks continues to spread uncertainty for investors as they attempt to determine the potential impact of political and geopolitical events (and non-events). The feud between the U.S. and North Korea, for example, which has intensified in recent weeks has definitely amplified investor apprehension. Nevertheless, markets have not been significantly impacted as fundamentals remain strong and international pressure from a number of different players has helped to reduce the odds of any action. The real focus for markets remain centered on issues that are pertinent to imminent economic growth prospects, both domestically and internationally.
The “Trump Trade” is the anticipation that fiscal policy and deregulation might produce a real economic difference. Looking out over the global horizon there is a compelling and substantive picture of the possibilities – if the right policies could be enacted. Against this backdrop, since August 2008 investors have been focused on Pennsylvania Avenue (rather than Wall Street) and Washington DC (rather than New York City). Exhaustive Federal Reserve, U.S. Treasury, and Obama Administration activity re-centered all investment discussions. Each of these were certainly a catalyst towards reassuring financial markets that 2008 was not the end of America. The activity has been substantial – measured in trillions (12 zeros!) – and, while the long-term ramifications are less clear, its short-term impact can be both powerful and positive. The “Trump trade” is the belief in the last chapter: the unwinding of government involvement and the unleashing of the private sector through policy.
There are at least three key themes that we have been watching to provide clues about the sustainability of U.S. market dynamics: interest rates, Federal Reserve balance sheet reduction, and tax cuts/reform. There are concepts in physics that describe the mass load that “can” be or, better put, “should” be linked together. The Barron’s headline from a week ago put it best, “Market Heaven, Political Hell.” While the Federal Reserve’s management of interest rates and the balance sheet have been lauded by markets, early-2017 certainty around fiscal policy has been quickly eroding. However, rational optimism still exists that corporate tax cuts can still be enacted by late first quarter of 2018.
The complication arises because of the physics-like “linking” of these three issues. If we fall into the crevasse, that’s terrible. But it’s worse (even catastrophic) if these issues are knotted together in such a way that the physics are against you, pulling down the entire agenda at once. Mind you, the healthcare fiasco earlier in the year showed that the cord could (for now) hold through one part tumbling into the crevasse: it held, but only because the markets believe it creates the room for the tax cut conversation.
In the short term, there are a number of meaningful complex issues we are anticipating: 1) U.S. budget resolution, 2) U.S. debt ceiling resolution 3) German election 4) U.S. tax cut conversation 5) Federal Reserve September meeting (and possible formal balance sheet reduction announcement). Because of the compressed schedule we would not be surprised by increasing volatility, with the context that current volatility is at all-time lows across multiple asset classes which only magnifies how the bumps feel for investors. While the calendar seems crowded, so long as tax reform is still in play we continue to think that global equity markets will grind higher, with internationals leading the way.