It's Inauguration Day. Whether you woke up today feeling good or bad about Trump at the helm doesn't change the fact that the U.S. economy is growing. Trump can't claim credit for this just yet. The evidence of growth is apolitical and suggests sectors like Industrials (XLI) and Financials (XLF) are a buy.
As you can see in the Chart of the Day below, this week’s inflation data (the Consumer Price Index or CPI) accelerated to +2.1% year-over-year growth. This week’s growth data (Industrial Production, measuring the manufacturing side of the economy) accelerated to +0.5% year-over-year growth.
Why this Matters: Growth
It's no wonder the Rust Belt states voted for Trump. For some time now, these states have been hammered by a protracted recession in the industrial side of the economy.
While 0.5% growth might seem like a paltry sum, the more important point is that Industrial Production broke a 15-month streak of negative year-over-year growth in December. This was the worst string of contractionary months the American manufacturing economy had ever seen outside of a broader U.S. recession.
The upshot is that other measures like the ISM Manufacturing survey and corporate capital expenditures have also broken out of late. It would seem that the manufacturing economy is growing once again after a protracted period of contraction.
Investing Implications: On dips in the sector, buy Industrials (XLI) as the manufacturing economy grows.
Why This Matters: Inflation
Trump has been at odds with Federal Reserve chair Janet Yellen for some time now. "Janet Yellen for political reasons is keeping interest rates so low that the next guy or person who takes over as president could have a real problem." Unknowingly, Trump may be right. Inflation is heating up.
The Consumer Price Index attempts to measure monthly changes in prices. Price stability is closely watched by the Federal Reserve, since falling prices are viewed as a negative for economic growth. Economic theory suggests that Americans save more and consume less when prices fall because they can expect to buy goods tomorrow at a relatively cheaper price. Inflation that's not-too-hot, therefore, is viewed as positive for the economy.
The Fed may get what they've wished for. CPI hit a year-over-year rate of 2.1% for the month of December, up from 1.7% in the prior month. This effectively ended 30 straight months of inflation readings that were stubbornly below the Fed’s 2% target.
Inflation Alert! Our proprietary leading indicator of inflation suggests it could hit three, even four, percent on a year-over-year basis in the first quarter of 2017 (click here to learn more about this indicator). In short, previously beaten down commodities, like oil prices, are rising and will push measures of inflation steadily higher.
Investing Implications: On dips in the sector, buy Oil & Gas Exploration and Production ETF (XOP) as inflation picks up.
Expect Trump to take credit for this modest economic turnaround at his swearing in speech today. Don't be fooled. The U.S. economy is growing but our 45th President has a lot to prove before he can claim victory.