Wall Street is betting that Donald Trump can kick-start the U.S. economy. The story goes that tax cuts and infrastructure spending will unleash a boom of pent-up economic activity. But let's not give the President-elect too much undue credit. Before he even takes office on January 20th, Trump will inherit an accelerating U.S. economy. Consider the evidence.
The market already sniffed out An Accelerating U.S. Economy
Sure, since Election Day, investors have been betting on Trump by buying the Russell 2000. It's up 14.8% since then, as a pure play, domestic-oriented stock index. But the market started to front-run U.S. growth accelerating back mid-2016.
Check out the sector performance from June 30th until just before Trump's victory in the chart below. Utilities (XLU), the classic outperformer when U.S. growth is slowing, was lagging while sectors tied to U.S. growth accelerating, like Industrials (XLI), Financials (XLF) and Materials (XLB), started to lead the pack. Note: This was a complete reversal of the trend in which Utilities led the sectors and Financials lagged.
Treasury bond yields, another important barometer of economic activity, also bottomed around this time. (Falling bond yields generally portend slower growth and conversely yields often rise during acceleration.) On July 6th, the 10-year Treasury yield hit 1.32% and have backed-up to 2.5% today.
U.S. Growth Expectations Were Confirmed by Economic Data
Data collected just prior to Trump's win, rubber stamped the market's prediction that the U.S. economy had bottomed.
- Durable goods and Retail Sales data for the month of October began improving.
- Then previously recessionary Industrial Production data started to look up.
- U.S. GDP for the third quarter stopped slowing, after five quarters of deceleration from 3.3% year-over-year growth in March 2015 to 1.3% in June 2016, .
Now that U.S. growth is so clearly accelerating, the U.S. dollar is ripping to the upside. As you can see in the Chart of the Day below, in the fourth quarter alone, the dollar was up +8.5%.
(Note: When U.S. growth and inflation are accelerating, we call this Quad 2 in our proprietary GIP model [Growth, Inflation, Policy]. To learn more check out, "A Closer Look At How We Actually Model The U.S. Economy.")
Now, to be fair, Trump can be credited with instilling a countrywide euphoria (i.e. Trumphoria) that has been spilling into recently reported November economic data. Time will tell whether it's justified but for the time being the data corrobates Wall Street's #TrumpTrade.
To be sure, we're in for an interesting 2017 under President Trump. This morning's mainstream media freakout is over Trump's tweets related to the ongoing tit-for-tat trade battles with China, the nuclear armament of North Korea, a border tax on General Motors and the wholesale repeal of Obamacare.
But a lot can happen in between Trump's 140 character tweet storms and the signing of actual legislation. In terms of market implications, we'll have to wait and see how this all shakes out. (Hedgeye's Washington Policy research team offered up their Trump policy predictions in a recent HedgeyeTV special, "Our Top Five Trump Administration Investing Themes.")
For now, we remain bullish on U.S. stocks as the economy continues to accelerate, at least until Inauguration Day.