March 1st, 2017 marks the peak of the Postelection stock market rally (a.k.a.: The Trump Trade). Whether we will hit a new high or see continued tapering (or perhaps, some sideways action), depends on a few key factors currently affecting the overall geopolitical landscape. Here are a few critical elements which will determine the bulls’ or the bears’ triumph.
We are currently in the very beginning stages of the 2017 First Quarter Corporate Earnings season, and the numbers are looking less than optimal. Although companies are showing profits, their financial results are not surprising Wall Street with significant earnings beats nor are there any indications of surpassing Wall Street expectations for the rest of the earnings season. The 2016 Fourth Quarter Corporate Earnings Season was a huge success, with companies showing surplus profits buoyed by positive guidance from many publicly traded companies. The current quarter indicates a slow-down in overall profitability, which could dampen unemployment in the very near future.
The latest unemployment numbers show a mixed-bag of results. The unemployment rate fell to 4.5%, from 4.7% a month ago. However, the most recent Bureau of Labor Statistics (BLS) numbers indicate only a 98,000 addition in nonfarm payrolls, when economists were expecting an 180,000 increase. The most recent Weekly Jobless Claims number, which shows the amount of applications for Unemployment Insurance Claims, totaled 234K employee claims vs. economist expectations of 245K.
This confluence of economic jobs data shows a growing job market. Perhaps, there was blip in March with non-farming jobs. But, we will not know if this was just a blip or if this is an ensuing slowdown until the April numbers come out. Regardless, the latest employment data does not show very convincingly strong momentum in the labor markets.
Doubts are arising with Trump’s expansionary fiscal policy promised by the President during his 2016 campaign. Investors are growing wary of Donald Trump’s ability to form policies which will make their way through Congress this year. Wall Street is opened to the very real possibility that an economic boom may not be coming.
The recent historical market rally, much hinges on expectations for significant tax reform. However, with news of the GOP Healthcare debacle, along with the prevalent political unrest in the Trump Administration, many are speculating that this administration is going back to the drawing board with many of their much necessary major economic policies — meaning that the ambitious August deadline for expansionary fiscal policy change is likely not going to be met.
On top of all this, lies the over-looming setback to repeal and replace the Affordable Care Act (ACA). Because the GOP could not come to terms with repealing and replacing the ACA, much of tax reform will be focused on filling up the “donut hole” caused by increasing healthcare costs for our nation’s citizens. This means that any tax reform that may take place in the near future will probably not be as expansionary as what the Trump Administration may have anticipated.
The current “economic nationalist” wing in the White House is the biggest supporter of Trump’s proposed $1 trillion infrastructure spending. However, according to the latest reports, members in this group, including the infamous Steve Bannon, are quickly losing influence in the Oval Office. The waning influence of the economic nationalists, coupled by buzz about conservative Republicans blocking any substantial infrastructure spending plan makes Trump’s over-the-sky-high hope of spending ten figures on restructuring our roads, bridges, and other public facilities appear less likely and investors are catching on.
According to many economic models, first-quarter real GDP growth projects to about a 1.0% annualized rate. The economy continues to grow, but at a very alarmingly gradual rate. The absence of any substantial infrastructure investment will, most likely, prolong this sluggish economic growth.
The Yield Curve unexpectedly flattened in the most recent months, with yields for 10-year Treasurys at the lowest point since the week after the 2016 election. Traditionally, a healthy yield curve, signifying economic expansion, would presuppose lower short-term rates with rising longer-term rates. A flattening of the yield curve would indicate slower economic growth, and an inverted yield curve forecasts a pending economic contraction, or recession.
As of late, the Fed increased short-term interest rates by a quarter-point basis, and with the advent of decreasing 10-year Treasury yields, we are faced with a problem where banks have to make larger interest payments on consumer deposits, but lend at lower interest rates for their loans. This can temporarily benefit the consumer but is very bad for banks’ net interest margins. Hence, the recent decline in bank stocks.
Newest economic data points to a 30,000 contraction in the retail sector’s labor market. Core retail sales were up only 0.1%, lower than the 0.3% expected by economists. As consumer confidence indexes rise near to their highest levels in over a decade, retail sales have actually dipped lately.
With the decline in traditional brick-and-mortar vending locations, online retail is growing and killing the old paradigm of consumer sales. You hear former behemoth stores, like Borders, Circuit City, and Radio Shack, declaring bankruptcy months and years ago. Now, you are hearing established institutions, like Macy’s and Sears, are in trouble. Next, you will probably hear about Wal-Mart and Target closing down stores. Online retailers, like Amazon, are going to be the way of the future. Unfortunately, companies like Amazon, are automating everything by using artificial intelligence and robotics to streamline their systems for greater efficiency. This means lower employment for the unskilled worker, which could temporarily put a dent in the economy.