IT’S A CURIOUS TIME FOR COMPLACENCY
Investors counting on best outcome despite uncertainty of Trump policies
We live in interesting times, probably the most challenging that I have seen in my career as an investor and money manager.
There remains much uncertainty, with the near-term future to be shaped in some unknown fashion by government policy both domestically and abroad. The world’s largest economy is now in the hands of a wild card, someone who is calling for material change but leaving everyone speculating on what that may look like.
Some have even chosen to follow President Trump’s Twitter feed, looking for clues as to his intended actions. One can’t blame them: besides using it as a tool to criticize reporters and his opponents, he has also publicly threatened specific companies with a large border tax if they build manufacturing plants outside of the U.S.
At the same time, there is an air of complacency in the equity markets, where investors are not just hoping for the best outcome but counting on it. Market strategists who had once warned of the catastrophic damage that would be caused under a Trump Presidency have all pulled a 180 and have become the market’s greatest cheerleaders.
This bullishness is so pervasive that we’re even seeing it at the local level. For example, we attended the 40th Annual Calgary CFA Forecast Dinner last week and our jaws dropped upon hearing one of the presenters call for a high double-digit return for the S&P 500 in 2017 and say it wouldn’t surprise them if it rallied as much as 20 per cent.
Investors are also listening to the sell-side reports out there that shrug off potential NAFTA risks to the Canadian economy, especially to the energy sector. As a result, certain stocks and sectors are discounting a zero impact in their valuations — something we view as quite dangerous when it comes to the forward risk versus reward outlook.
The bottom line is that a Trump Presidency is indeed something worth worrying about as he may well have more of a negative impact than a positive one on Canada’s markets and its economy. When it comes to how negative, we agree with Bank of Canada governor Stephen Poloz when he says the ramifications of U.S. trade policy remain unknown at this point and we will simply have to wait before responding.
Meanwhile, the S&P TSX is a mere 150 points away from its all-time high as investors put on their blinders and choose to chase 2016 returns hoping they will repeat. The same is happen- ing south of the border with their own bandwagon jumpers as evident by the strong funds flow into passive equity ETFs and the S&P 500 setting its own new highs.
That said, there are those out there brave enough to challenge the status quo offering their own dash of common sense such as the former U.S. treasury secretary, Larry Summers. In a recent Bloomberg interview, he forewarned about the consequences of a high U.S. dollar and policy uncertainty that have yet to be reflected in both the markets and the economy.
Here in Canada, we have yet to see how our rookie federal government will respond to any trade challenges and policy changes that could impede our economic well-being. This in itself is another risk, as any mistakes in negotiations could compound any negative impacts.
One of the first items on the Trump administration’s agenda is trade renegotiation, including NAFTA, followed by a large reduction in both personal and corporate tax rates. Meanwhile, our government has taken a different path, instead choosing to implement material tax increases in the form of higher income taxes and a new national carbon tax.
Looking ahead, unfortunately, there are likely more tax hikes on the horizon, including talk about the federal government taxing health-care benefits. On a corporate level, Canada has benefited from advantageous tax rates compared to the U.S., which is also going to change under President Trump.
That said, it’s not all roses south of the border as the American market and its economy may be negatively affected as well from a potential trade war with China, an unchecked rally in the U.S. dollar, and a large fiscal spending plan at a time when unemployment is back to record low levels.
It also doesn’t help that the Federal Reserve (which is not controlled by Trump) remains keen on hiking interest rates as domestic and global U.S. denominated debt reaches new highs.
With all of this uncertainty ahead and equity markets at maximum complacency, perhaps now is as good time as ever to at least look at taking some profit off the table or employing some riskmanagement strategies to your portfolio.