Will policy uncertainty overrule market confidence in 2017?

Market players expecting Trump-driven economic growth may be setting themselves up for disappointment

Will policy uncertainty overrule market confidence in 2017?

The election of Donald Trump as president of the United States was a jolt to the financial markets in late 2016. But rather than being a damaging blow as many expected, it became a push that propelled equities upward. Chalk it up to the president-elect’s campaign trail policy pronouncements, which are expected to boost the US economy.

Still, market expectations may be overshooting economic reality, according to ETF Capital Management Co-founder Larry Berman. Based on historical trends, the chartered financial analyst has predicted down times for 2017 in a piece published by the Globe and Mail.

“The average recession since the end of the Second World War lasted about 10 months and occurs about once every five years,” he said. “[T]he odds of a recession in any given year is about 15% to 20%. We are clearly in the late innings from the 2009 recession low, so the odds of a recession in the next year or two [are] probably closer to 50%.

“It’s also helpful to know the odds of a market going up or down on any given year by looking at historic trends,” he went on. “[F]orecasting a bear market (greater than 20% decline) is hard, but it statistically gets easier in the late innings when valuations are high. If history is a guide, therefore, a recession appears imminent.”

While some believe that lower taxes and increased government spending would stimulate job growth, Berman has his doubts. “Real wage growth is not likely to improve much despite Mr. Trump’s mantra on bringing jobs back home,” he said. “Blame it on the fintech, robotics, artificial intelligence and other job-killing technologies that are growing at a rapid pace.”

Going beyond the effectiveness of the proposed policies, there is also a question of how they’ll actually be implemented. “My bet would be the U.S. Congress will only be able to get the tax rate down to about 25 per cent from 35 per cent over four years,” Berman wrote. “The Tea Party debt hawks will look at the trillions Mr. Trump wants to spend on infrastructure and they will be unlikely to get much more aggressive with US debt to GDP at over 105 per cent. The market is trading as if these things are all going to boost earnings in 2017, but they will not.”

Still, Berman is not cutting his exposure to the US totally. The European market remains risky, he said, with Brexit negotiations and elections in France, Italy, and Germany casting doubt upon the region’s economic future. As for China, he foresees volatility underpinned by capital flight and a loss of confidence in their ability to manage their economic transition, especially complicated by Trump’s trade concerns.

“I still see the US economy and market as the best dirty shirt in the laundry,” Berman said. “The Canadian and US markets are not quite priced for perfection, but they are not priced for any disappointments, which we see as a much bigger risk than the market.”


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