Duck, Here Comes More Information
December 5, 2016
This past week it was hard to find a single theme for the Weekly; maybe it was the lasting effect of tryptophan from turkey day. More likely is the fact that we are in an unusual post election time period where meaningful and market impactful news is constant.
As you look at major markets and price movements for the week you would notice that oil prices are currently “on fire”. The price of Brent Crude rose 15% to over $54.00 a barrel in one week. All this price movement occurred after OPEC members stopped their normal infighting to recognize that a long term oil glut hurts them all. To the market’s surprise OPEC agreed to large cuts in production that should slowly reduce the current surplus.
The market has also embraced so far the cabinet appointees coming from the President elect. The revolving door of Trump Tower has seen scores of men and women interviewed as Trump builds the team to enact his policies. The New York Times editorial page referred in the same sentence to a “dangerously ignorant President” who had picked a new Secretary of Defense who showed “reason and experience”. The general review across both parties is that the choices so far are accomplished. The market’s reaction has been positive.
“Reflation” is a term that is being used more and more. What is it? Reflation describes fiscal or monetary policies designed to expand a country’s output. The prospect of reflationary policies under a Trump administration is stimulating investors to move from an expectation of no inflation with super low interest rates to a world with inflation and rising rates. Bonds are now being sold by investors who fear rising rates will send prices down. As the cost of borrowing rises, banks flourish and investors look for trades that work as inflation is rising. Just this month investors have invested $1.4 billion in ETFs tied to Treasury Inflation Securities (TIPS).
Discussion of lower corporate tax returns caused some to analyze how much corporate earning could grow as a result of a tax cut. Skeptics might point out that tax reductions are not real earnings expansion. Say what you want, it means CEOs will have more earnings to either expand their business, raise dividends, buy stock back, or raise wages. All of which will be viewed positively in the market.
On Friday, the monthly employment numbers from the Department of Labor showed more steady employment gains in the US. The most surprising aspect to the numbers was that the unemployment rate dropped to a 9 year low of 4.6%. 15 million new jobs have now been created since early 2010.
All of this shapes up for yet another important FOMC meeting. The next two day discussion of the US economy is set for December 13th and 14th. Currently market forecasters are all but certain that, given the strength in the economy, the Fed will raise rates.
Carl Gambrell
