MACROECONOMICS
FX
tax reform will be just as difficult to achieve aſter the healthcare failure. Furthermore,
it is our view that
financial deregulation will garner a lot of opposition and the infrastructure spending plans, because they look like they will be via tax credits relying on private sector investment, will be less effective in boosting the economy than many believe.
Chart 1 – Te S&P 500 Index
it makes the Trump administration look pretty inept in our opinion. Furthermore, with Obamacare as we know it crumbling, what is plan C? If the US healthcare system is at risk of not functioning adequately then it cannot be good for America.
As can be seen in chart 1, the S&P 500 Index had been tracking broadly sideways for nearly two years into the US election. Tis period of no performance coincided with the Fed beginning to normalise policy and the economy was mired in a stop- go period where corporate earnings actually declined (mostly because of the energy sector). Ten along comes Trump and the equity market buys into the reflation narrative completely. Te bullish narrative is that growth will be energised by a combination of deregulation, tax cuts
and infrastructure spending.
In the weeks post the election, we repeatedly talked about how the reflationary Trump narrative could be
either
We think that whether you are an optimist or a pessimist on the Trump administration, the events of last month have to bring into question just how successful Trump will be in boosting the US economy. If, aſter sober analysis, an investor can say that they truly believe that the Trump administration has a high probability of success, then they will be comfortable in owning equities even aſter
the 15% advance elegantly played out or
not. We also voiced concerns that he would fail to generate a sustained increase in the growth rate of the US economy. So far, we have seen nothing that
is elegant from the Trump
administration, and we now wonder whether the healthcare failure is indicative of what may befall all of his main policy proposals.
Boosting the US Economy
Te optimists out there will say that we should just put this healthcare defeat behind us, and focus on the tax cuts that are coming. Well, surely there is an equally valid opinion that
since
the elections. Anyone who is now questioning whether Trump will be able to make any of the big changes he promised, then surely they will have to look at the recent market rally and the current valuations matching previous bubble peaks (depending which valuation measure) as an opportunity to take profits and move to the side lines.
Will the healthcare debacle have an impact on sentiment
in the US?
We have all read how the survey (or soft) data was outpacing the hard data since the US election. The question was really whether the survey data was “leading” the hard data or getting ahead of itself.
FX TRADER MAGAZINE April - June 2017 19
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