Quarterly Investment Strategy
United States: a tired economy about to get a vitamin boost
Peaks in corporate profits, employment and bank lending had been signalling increasingly precarious late cycle conditions in the US.
Donald Trump’s intended stimulus plan will put the economy on a temporarily – not permanently – higher growth path.
While the Fed has shifted to a more neutral stance, letting fiscal policy take over, it will likely remain data-dependent in its interest rate policy rather than trying to preempt a pick-up in inflation.
Many of the growth headwinds that existed in the US – and globally – before the November 2016 election remain in place. As such, a Trump presidency has no bearing on our 1.8% estimate of underlying potential US growth. What is does, however, suggest is that the 2017 economic trajectory should exceed this potential, with GDP (Gross Domestic Product) set to expand by some 2.5%.
Donald Trump’s quest for growth means that he may actually tread carefully on the protectionist promises that he flagged during his campaign and with respect to his relationship with the Fed. Still, while the President-elect’s intended stimulus plan should put the US economy on a temporarily higher growth path, it will be no easy trick to pull off. If stimulating the economy through large-scale deficits at already record-high (peacetime) debt-to-GDP ratios were straightforward, Japan would have been booming for years. Reforming the US tax code will certainly boost business spending, but growth expectations for the next 12-24 months must be tempered by the USD 20 trillion national debt load and large projected budget deficits.
As regards monetary policy, although the Fed just hiked rates by 25 basis points for the second time this cycle and upped its forward guidance slightly, we are assuming that it will allow the early stage of Trump reflation to proceed without a decisive acceleration in interest rate adjustment. Not only have we long belonged to the low growth / low inflation camp, but we currently still observe limited upward price pressures in the US – outside of the shelter and medical care sectors. With wage pressures also contained, and the dollar having strengthened, we see little reason for the Fed to deviate from its path of gradual tightening, and risk hiking rates more than twice in 2017. Rather, it is likely to adopt a “wait and see” attitude towards the new administration. So, while monetary conditions in the US have clearly deteriorated – as evidenced by the rise in bond yields and currency – they are not yet a cause for alarm. For now, monetary aggregates and bank lending growth remain supportive.
That said, comparisons of Trump and Reagan do bemuse us. President Reagan took office in a low debt, high inflation economy that proceeded to benefit from a very supportive Fed. The 1981-1982 recession was ended thanks to a 1,000-basis point cut in the Fed funds rate between 1981 and 1983. President Trump will not have that luxury.
IMPORTANT INFORMATION – GENERAL MARKETING
This is a marketing communication issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This marketing communication is provided for information purposes only.
It does not constitute an offer or a recommendation to subscribe, to purchase, sell or hold any security or financial instrument. It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information herein contained do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the marketing communication or otherwise review it with your external tax advisors.
European Union Members: This marketing communication has been approved for issue by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: Belgium: Lombard Odier (Europe) S.A. Luxembourg · Belgium branch, a credit institution regulated in Belgium by the Banque nationale de Belgique (BNB) and the Financial Services and Markets Authority (FSMA); France: Lombard Odier (Europe) S.A. · Succursale en France, a credit institution and regulated in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities; Italy: Lombard Odier (Europe) S.A. • Italian Branch, credit institution governed in Italy by the Italian stock market regulator (Commissione Nazionale per la Società e la Borsa , or CONSOB) and the Bank of Italy; Netherlands: Lombard Odier (Europe) S.A. · Netherlands Branch, a credit institution regulated in the Netherlands by De Nederlandsche Bank (DNB) and by Autoriteit Financiële Markten (AFM); Spain: Lombard Odier (Europe) S.A. · Sucursal en España, a credit institution regulated in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV); and United Kingdom: Lombard Odier (Europe) S.A. · UK Branch, a credit institution regulated in the UK by the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.
In addition, this marketing communication has also been approved for issue by the following entities domiciled within the European Union: Gibraltar: Lombard Odier & Cie (Gibraltar) Limited, a firm which is regulated and authorised by the Financial Services Commission, Gibraltar (FSC) to conduct banking and investment services business; Spain: Lombard Odier Gestión (España) SGIIC, S.A., an investment management Company authorised and regulated by the CNMV. Switzerland: This marketing communication has been approved for issue by Bank Lombard Odier & Co Ltd, a bank and securities dealer authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA). United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.This marketing communication may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier. © 2016 Bank Lombard Odier & Co Ltd – all rights reserved.