President-elect Donald Trump took a victory lap Monday night on Twitter writing, "The world was gloomy before I won - there was no hope." Trump cited stock market returns since his election and Christmas-time spending as proof that this shroud of economic anxiety has finally lifted. It would appear, he is already "Making America Great Again."
https://twitter.com/realDonaldTrump/status/813527932165558273
The U.S. Economic Outlook Strengthened After Trump's Win
It's true. Since Trump's Election Day victory, U.S. equity markets, bond yields and the U.S. Dollar have rallied. Consumer, Homebuilder and Business Confidence are all rising. U.S. economic growth is strengthening (though recently reported, this had nothing to with Trump since the data was recorded well before Election Day). Third quarter GDP came in at +1.7% year-over-year growth, an acceleration of 0.4 basis points versus the prior quarter.
This stands in stark contrast to a nasty slowing U.S. economy that slowed for five consecutive quarters, from the peak of 3.3% in March 2015 to the bottom of 1.3% in June 2016.
Recent macro market moves are characteristic of what we call QUAD 2 (when both economic growth and inflation are accelerating). In this environment, sector exposures like Financials, Industrials, and Tech outperform.
That's exactly what's been happening:
- Russell 2000 (the small cap, domestic play on the U.S. economy): +0.5% last week; fourth quarter to-date gain +10.8%
- US Dollar Index: +0.1% last week; fourth quarter to-date gain +7.9%
- Financials (XLF): +0.9% last week; fourth quarter to-date gain +23.8%
- Tech (XLK): +0.8% last week; fourth quarter to-date gain +3.0%
- Industrials (XLI) were up another +0.7% on the week; fourth quarter to-date gain +8.9%
Stocks highly correlated to the market (otherwise known as "high beta") continue to outperform. High beta stocks are up 21% year-to-date versus 9.6% for equities less tethered to market performance (otherwise known as "low beta").
Strong Dollar Lifts U.S. Equities (Hammers Gold, Emerging Markets)
As you can see in the Chart of the Day below, the U.S. Dollar has a 90-day correlation to the S&P 500 of 0.7, which means, over the last 3 months, when the dollar rises or falls so too does the broader equity market. Conversely, Gold doesn't like #StrongDollar so much (with a correlation of -0.96 over the same period). The barbarous relic is -13.4% so far this quarter.
Meanwhile, Emerging Markets stocks have been getting shellacked. The MSCI Emerging Markets Index was down another -1.7% last week, taking its Q4 loss to -6.8%.
The Silver Lining For Japanese equities
The fourth quarter to-date has been especially kind to investors in Japanese equities. The Nikkei is up a monstrous +18.1% in the quarter, putting it back in the “green” at +2.1% year-to-date. The playbook is pretty simple there: Dollar Up = Yen Down = Nikkei Up. Take a look: The Japanese Yen is down -13.6% versus the dollar for the fourth quarter.
A quick recap...
It's pretty simple what you do from here: As U.S. growth continues to accelerate, expect the U.S. Dollar to rise, U.S. stocks to go up (Financials, Technology, Industrials), Japanese equities up and Emerging Markets and Gold down.