1. Weekly Market Insights
Dow Jones: YTD % ‌ │ S&P 500: YTD +2.50% │ NASDAQ: YTD %
January 30, 2017
A break through!
The Dow Jones finally closed above 20,000. Even with breaking this milestone, investors seem to be cooling their ardor, at least for the moment.
The fourth quarter GDP estimate was released last week and it showed a disappointing 1.9% growth and durable goods, those goods expected to last three or more years, falling .4% for the month. Investors should not fret too much over these numbers; yes, they show anemic growth, but as we cautioned readers in the past, all these numbers are subject to revision which are often substantial. Durable goods is a highly volatile number and was heavily influenced by a slowdown in military spending.
It is hard to write about the economy or markets without bringing the nascent Administration into it. There has been such a flurry of Executive Orders and comments coming from the White House and responses both official, coming from the Legislative Branch, and from the public in general, that investors must try to decipher. Mr. Trump has pulled the United States out of the TPP. This should be no surprise as both candidates spoke against it. Mr. Trump is also calling for a renegotiation of NAFTA. This renegotiation along with the possible special import tax on Chinese goods can spell problems for the United States and be counterproductive when dealing with their stated purpose, to create jobs. Canada, Mexico and China are the biggest trading partners the United States has. Any disruption of this can have serious unintended consequences. Next is the embarrassing sequence of the “WALL”. It is well known that Mr. Trump has promised his supporters that he will build a wall between Mexico and the United States and make Mexico pay for it. His latest plan is to have a 20% import duty on all Mexican goods imported to the United States. It should come as a surprise to no one that Mexico clearly rejects this. So much so that Enrique Pena Nieto, President of Mexico, cancelled a meeting he had scheduled with Mr. Trump in Washington. He did this in no uncertain terms. The next day, Mr. Trump announced that he and the President of Mexico had jointly called off the meeting. This does not inspire confidence since everyone is keenly aware the meeting was called off by the President of Mexico unilaterally. It is, however, interesting to see what would happen if the Trump plan went through. The increase in the cost of imports would certainly be passed through as all taxes are to the consumer. Therefore, the American consumer would pay for the wall but most would never know it. This is not what those who thought the original idea was good had in mind but it is certainly what they would get.
Mr. Trump has said he feels he can grow the U.S. economy at 4% and create 25mm jobs in ten years. This, if achieved, would be a remarkable feat. The problems faced when trying to achieve these two goals are difficult to overcome. First growth, as measured by GDP using the functional formula, G=f(l,c), is simply that growth of the economy relies on the relationship of capital and labor. The Federal Reserve, (FED), feels the U.S. is at or very close to the, sorry for some economic jargon, Non-Accelerating rate of Inflation, (NAIRU). This is important because in the absence of immigration, the l in the equation remains stable, and it becomes very difficult to grow the economy and certainly to create jobs. This also requires the FED to remain with an easy money policy in violation of their legislated mandate to keep inflation under control and work toward full employment. At the moment the FED seems to be on board with a stimulative monetary policy. When raising interest rates this past December, FED Chair Janet Yellen spoke of possibly three more hikes in The U.S. would still have negative interest rates even after raising rates another 75bp’s, (.75%) with a 2% inflation rate.

2. Weekly Market Insights
Dow Jones: YTD % ‌ │ S&P 500: YTD +2.50% │ NASDAQ: YTD %
January 30, 2017
A break through! (con’t)
Mr. Trump argues for a large stimulative infrastructure program. This is really a very good idea, but when taken along with the rest of the overall plan its positives begin to fall away. The first problem will be to get it passed by his own party’s budget hawks who are substantial in numbers. They see the program adding significantly to the budget deficit, which in the short run it certainly will. Economically, without a growing labor supply, it becomes highly inflationary. It is a case of a very good idea when taken alone but loses its appeal when viewed in conjunction with the rest of the overall plan.
Mr. Trump will have a problem satisfying his most fervent constituency. Phillip Stephens quotes a Pew Poll in the Financial Times: 6 of 10 Americans want the U.S. “to deal with its own problems and let other countries deal with their own problems the best they can.” The same poll shows a majority of Americans still want the U.S. to retain its global primacy.
- Michael Olin Clark
The Week Ahead:
MONDAY: Germany CPI (y/y) expected at 2.00%, US Personal income expected at .40%, US PCE core (y/y) expected at 1.70%
TUESDAY: Japan Housing starts (y/y) expected at 8.40%, France GDP (y/y) expected at 1.10%, France CPI (y/y) expected at 1.00%
WEDNESDAY: US ISM manufacturing expected at 55, US Construction spending (m/m) expected at 0.30%
THURSDAY: US Nonfarm productivity expected at 1.00%, US Unit labor costs expected at 2.00%
FRIDAY: US Nonfarm payrolls expected at 172K, US Unemployment rate expected at 4.70%, US Average hourly earnings (y/y) expected at 2.80%
The views expressed are subject to change. Any data cited have been obtained from sources believed to be reliable. The accuracy and completeness of data cannot be guaranteed. Past performance is no guarantee of future results.