It’s beginning to look like there will be no quiet weeks in the Trump Presidency. However, laying out the details of his agenda will be complicated, requiring work by his various cabinet secretaries and their staffs and agreement with congressional Republicans. Consequently, in many areas, it will take weeks, if not months, for new policies to fully take shape.
Nevertheless, it is quite possible that actions and statements by the new President could move markets in the week ahead. A reiteration of promises to roll back regulations, cut taxes, and increase infrastructure and defense spending would likely be stock-market friendly and bond-market negative. However, tough talk on tariffs and tightening visa programs would be less so, particularly if it triggered an aggressive response from our neighbors and trading partners.
During the election campaign, it was often noted that the Republican Party was split between a populist wing that favored a crackdown on illegal immigration and a tougher stance on trade and more traditional Republicans focused on lower taxes, less regulation and more defense spending. In the end, these two wings mostly came together to elect Donald Trump. The net effect of the policies of either wing, at this stage, would probably represent bad news for the bond market, either because they might tend to restrict labor supply and increase inflation directly or because they could provide significant fiscal stimulus.
However, the traditional Republican agenda seems far more equity friendly. Consequently, the fortunes of the U.S. stock market in the months ahead may depend to a large extent on which side of the Republican Party ultimately wins these policy debates.
When investors aren’t watching Washington this week there should still be plenty to move markets. On the economic front, data on New and Existing Home Sales and Home Prices should paint a generally positive picture. The four-week moving average for Unemployment Claims hit a 43-year low last week and a continuation of this trend would provide further confirmation that the economy is essentially at full employment.
Numbers on International Trade, Inventories and Durable Goods for December should tee up Friday’s GDP report. We are expecting real GDP growth of 1.9%, as a solid gain in real consumer spending is offset by weakness in government purchases and stronger inventory growth is negated by a worsening trade deficit. Investors will also be watching inflation data within this report. We expect the GDP deflator to rise by 1.9% annualized in the fourth quarter and the personal consumption deflator to increase by 2.2%. Overall, a GDP report that would certainly justify a higher level of interest rates but not one that is likely to trigger action from the Fed when the FOMC meets next week.
Investors will also be looking at January flash PMI data from Europe and Japan that shouldn’t show much deceleration from strong December readings.
Finally, we are in the thick of the earnings season, with 70 S&P 500 companies set to report in the week ahead. As of last Thursday, with 15% of market cap reporting, earnings appear to have fully recovered from their dollar/oil slump of 2015 and overall operating earnings per share will likely end up between $28 and $30 for the quarter, coming close to the all-time high of $29.60 achieved in the fourth quarter of 2014. However, in a slow-growing economy with rising wage pressures, earnings gains from this point on will be harder to achieve, without Washington tax relief.
Still, having said this, the general flow of news should be more supportive of equities than bonds, even as policy uncertainty persists.
Chief Global Strategist