Markets continue to be either hitting, or flirting with, record highs as investors continue to follow 2017’s underlying narrative: that the Trump administration will stimulate the U.S. economy. But until we get some concrete direction on what Trump is actually going to do, John Wilson
, CEO of Sprott Asset Management
, foresees a lot of churning. “Some of the consensus trades have been harder to call this year: most people thought Trump’s actions would be good for the U.S. dollar, but it has not performed that well year-to-date,” Wilson says. “Also, people are getting bullish in energy, and globally that hasn’t performed great year-to-date either.”
Regardless of how one feels about Trump’s politics, it’s fair to say that some of his near to medium-term objectives could be positive for certain elements of the stock market. Deregulation is a controversial topic but certain industries will clearly benefit from reduced costs and more freedom if, as expected, it becomes a reality. That’s an area, along with potential tax reforms, that Wilson and his team are watching closely. “You can argue over the long-term about whether cutting taxes and increasing the deficit is a good idea, but in the near to medium-term the markets are going to like lower tax rates,” Wilson says. “We’re paying close attention to groups of industries that will benefit from that, primarily exporters, and groups that don’t benefit, like importers. That’s going to be a real battle over the next six to nine months.”
Wilson believes the markets can go higher this year, but that there will be winners and losers. Equities are not cheap, but as long as the U.S. doesn’t do anything dramatic from a geopolitical perspective, and does implement some sort of tax reform, the markets will respond positively. “We always hedge portfolios against big market declines and pay attention to the macro situation for market level risks,” Wilson says. “However, I don’t think those risks are high the moment, but they may evolve as we move through the year. Our biggest focus is on policy in the U.S. and what that’s going to drive in terms of fundamental changes for the earnings outlooks of individual companies.”
The equity market last bottomed out nearly eight years ago, in March 2009, and the markets have had a great run since then. But markets are cyclical and, for Wilson, the end of the current cycle could be closer than many investors envisage. “I think we’ll have an economy that continues to do relatively well and gets some stimulus from the federal government in the U.S.,” Wilson says. “ I think the Federal Reserve may hike rates faster than people think, which could eventually cause the next recession; maybe that’s next year or the year after, but it will not be a good environment for stocks.”
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