Trump Stimulus Expectations Driving US and World Economies
$DIA, $SPY, $QQQ, $VXX
The world economy will grow steadily over the next 2 years, meaning investors should stay invested in equities, according to Barclays Capital Plc.
Barclay’s analysts presented several major themes for the next 2 years Thursday, they are:
- President Donald Trump and Republicans in Congress will enact some kind of stimulus plan as the Y 2018 mid-term election looms for lawmakers
- European stocks are undervalued compared with US stocks and
- Deflation risks have ebbed globally.
- There will be tax cuts in the US, both corporate and personal
Some investors are concerned that a Trump failure to get healthcare reform through Congress may embolden opponents to his plans to cut taxes and reduce regulation.
Negotiations between the conservative House Freedom Caucus, which wants a complete repeal of Barack Obamacare, and President Trump have been ongoing since Speaker of the House Paul Ryan, (R-Wisc), introduced the bill last week.
The scheduled 23 March has been delayed.
“The Trump administration’s decision to focus first on health care legislation, rather than tax policy, has caused us to push our forecast trade and fiscal policy initiatives back to early 2018 and to reduce the magnitude of the assumed fiscal expansion,” Barclay’s said. “The risks associated with this new policy scenario lie not in the revised economic outlook, but in the possibility that investors could become anxious that tax reform will be derailed by political setbacks.”.
“If investors lose confidence that the Republican administration and Congress can deliver tax cuts, we would expect a negative market reaction,” the bank’s analysts said, “but it seems unlikely that investors will price in any such political stalemate for several months; the Trump administration has made it clear that a fiscal package is likely only toward the end of 2017.”
Barclays said European stocks are a better value than US equities, especially since the bank does not expect political disruptions as French elections loom. European stocks have a 12-month forward price-to-earnings multiple of 15X, compared with 18X for US equities.
“Earnings are starting to perk up in Europe,” according to Barclays. “For the 1st time since 2010, a broad range of European stocks is receiving upgrades to earnings estimates.”
That’s not to say investors should abandon US stocks even though they have gotten more expensive since the November 8 election.
The S&P 500 trades at a 12-month trailing multiple of about 20X adjusted earnings with a short-lived collapse in energy industry profits inflating trailing P/E ratios slightly.
“Global equities are not at such frothy valuations that they create an independent market risk of their own,” Barclays said. “We expect financial markets to remain risk supportive in the absence of a material economic or political disappointment. This will eventually happen, but we do not think it will be in the calendar quarter or two immediately ahead.”
Since the financial crisis of Y 2008, central banks globally have loosened credit as a way to combat deflation. Monetary policymakers see deflation as a sign of economic weakness.
The bank forecasts that the global economy will grow 3.7% this year and 3.8% in Y 2018.
“While unimpressive by historical standards, this forecast is meaningfully firmer than in 2016, in both advanced and emerging economies,” according to Barclays. “This global improvement has been helped by the upswing in producer prices stemming from the stabilization of commodities in 2016.”
Thursday, the major US stock indexes finished flat at: DJIA -4.72 at 20656.65, NAS Comp -3.95 at 5817.70, S&P 500 -2.49at 2345.94
Volume: Trade on the NYSE came in at 945-M/shares exchanged.
- NAS Comp +8.1% YTD
- S&P 500 +4.8% YTD
- DJIA +4.5% YTD
- Russell 2000 -0.3% YTD
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