April 28, 2017
Dazed by the past 100 days?
Brian Nick, Chief Investment Strategist, TIAA Investments
Article Highlights
•
The learning curve for any new president is steep, especially for the first chief
executive never to have served in government or the military.
•
European and U.S. equities stage a relief rally following the outcome of the French
presidential vote.
•
Q1 GDP growth disappoints, but we expect stronger economic activity over the
balance of the year.
•
The housing market, though, continues to deliver.
•
High-yield bonds outperform in a challenging week for fixed-income investors.
Quote of the week
"Accomplishment is socially judged by ill-defined criteria, so that one has to rely on others
to find out how one is doing.” – Canadian psychologist Albert Bandura
The Lead Story: President Donald Trump’s first 100 days
During his first 100 days in office, Franklin Delano Roosevelt had his entire cabinet sworn
in as a group, signed into law 15 major bills, and began rolling out the New Deal, his
program to combat the ravages of the Great Depression. Even though this time period
constitutes just 7% of a four-year term, since FDR’s death in 1945 it has become—fairly
or unfairly— the benchmark against which journalists and historians measure a new
administration’s progress.
So how do voters feel about Trump after his first 100 days? According to an ABC
News/Washington Post poll, not so good. His popularity rating stands at only 44%, the
lowest of any president at this stage of his administration. (In an example of past polling
not guaranteeing future popularity, Bill Clinton garnered the second-worst percentage,
59%, but won re-election.) Without question, Trump has come to realize that the learning
curve for any new president is steep, much less for the first chief executive in American
history never to have previously served in government or the military.
The president has taken his share of lumps. For example, his highly publicized executive
order banning travel from certain Muslim-majority countries remains stuck in the courts,
Dazed by the past 100 days?
and the Republican’s effort to repeal and replace the Affordable Care Act has yet to even
come to a vote on the House floor. Trump’s win column includes the Senate’s
confirmation of Neil Gorsuch to serve on the Supreme Court, and the fulfillment of
campaign promises to withdraw from the Trans-Pacific Partnership and initiate the
process of building the Keystone Pipeline.
This past week, in a bid to boost economic growth, the White House unveiled a plan that,
while notably short on specifics, would simplify the tax code and cut corporate and
individual tax rates. Plans for a $1 trillion infrastructure plan are scheduled to be unveiled
later this year.
During Trump’s tenure, U.S. economic data has been mixed. Encouraging “soft” data
(such as consumer, homebuilder, and CEO sentiment surveys) stands in stark contrast to
mostly tepid “hard” economic activity. Focusing on the former has helped the large-cap
S&P 500 Index rise 10.4% since November 9, the day after the U.S. election. With their
domestic tilt, smaller companies, as represented by the Russell 2000 Index, have surged
19.4% over the same time frame amid expectations for corporate tax relief, better
economic growth, and a rising dollar. (A strong dollar hurts sales and profits of larger-cap
multinationals by making their exports more expensive in overseas markets.) Both
indexes have traded flat over the past two months, as higher valuations based on
assumptions around the impact of future Trump administration policies have come into
question.
The bond market, in contrast, has homed in on the economy’s actual performance, the
hard data. Instead of continuing its fourth-quarter uptrend, the yield on the bellwether 10year note has fallen in 2017. There are other reasons for the decline—including dovish
minutes from the Federal Reserve and rising geopolitical tensions in North Korea and
Syria—but for now, fixed-income traders harbor doubts over Trump’s ability to jumpstart
GDP growth.
In other news: The economy underwhelms in the first 90 days of 2017
News that U.S. GDP grew at only a 0.7% rate in the first quarter will not have come as
welcome news to the White House. Moreover, the number disappointed both our and
consensus expectations of at least 1% growth, thanks to the weakest consumer spending
contribution since 2009. At 70% of the economy, consumer activity has the ability to
“make or break” the growth rate even if investment adds positively—as it did in the first
quarter—and trade, which also contributed, albeit modestly, is no longer a drag.
Some of the lackluster spending may be seasonal in nature, with the warm winter leading
to lower home heating costs. In this case, higher personal savings rates—which should
bolster consumer balance sheets—coupled with robust consumer confidence and
improving wage growth, may well trigger more robust economic activity over the balance
of the year.
Dazed by the past 100 days?
The market’s reaction to the GDP report was relatively muted. Most of this
disappointment had already been priced in, as the softness during the first quarter
became apparent in the past six weeks’ economic data. Despite the economy’s slow
start, we maintain a growth forecast of 2%-2.5% for 2017 as a whole, with the risks for
the year now skewed to the downside, due to the weak Q1 print. For 2018, our forecast
still calls for 2.5% annual growth.
Among the week’s other releases:
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Home prices rose 0.4% in February and 5.9% versus a year ago, according to
the S&P/Case Shiller 20-City Composite Index. New home sales soared 5.8% in
March, to their fastest pace in eight months.
•
Consumer confidence slipped in April from March’s 16-year high but remained
strong, according to The Conference Board. Consumers remain confident that
the economy will continue expanding in the months ahead.
•
Durable goods orders (aircraft, machinery, computer equipment, and other bigticket items) increased 0.7% in March, and February’s orders were revised
upward. Orders for “core” capital goods (a measure of business investment)
increased for the sixth consecutive month.
Current updates to the week’s market results are available here.
Below the fold: Global equities wave the Tricolour
Polls for the first round of the French presidential election turned out to be extremely
accurate, and the April 23 result came in as expected. Center-left candidate Emmanuel
Macron will square off on May 7 against right-wing nationalist Marine Le Pen. Notably,
neither major party candidate made it to the final two, a sign of the economic and political
frustration among the French people.
Global equity markets cheered the outcome, rallying hard on April 24 before gradually
petering out. Europe’s broad STOXX 600 Index soared 4.4% for the week (in U.S.
dollars), bringing its year-to-date advance to 12.2%. The S&P 500’s 1.5% gain lifted its
year-to-date return to a healthy 7.2%.
Fixed-income markets, meanwhile, clearly expect a Macron win. (Current odds of a Le
Pen upset are less than 15%.) Assuming that scenario unfolds, European sovereign bond
yields could rise from current subdued levels, as investor attention pivots from the
election and toward an improving European economy.
In the U.S., Treasury yields rose modestly during the week, supported by mostly positive
corporate earnings releases and reduced fears of a government shutdown. (Yield and
price move in opposite directions.) After beginning the week at 2.24%, the 10-year
Treasury yield closed at 2.29% on April 28. In our view, a stronger economy, fueled by a
significant increase in consumer spending, could lead to higher interest rates.
Dazed by the past 100 days?
Returns for non-Treasury fixed-income “spread sectors were lower through April 27.
High-yield corporate bonds, though, bucked that negative trend.
The Back Page: When 100 days lasts 105 days…or 110
In France, another great leader is associated with a crucial 100 days in history, although
his story did not end as favorably as FDR’s.
After escaping from exile on Elba, Napoleon triumphantly arrived in Paris on March 20,
1815. Having gotten wind of the former emperor’s return, King Louis XVIII fled the city. In
June 1815, Napoleon was defeated by the combined armies of Europe at Waterloo,
ending the Napoleonic wars (but providing the inspiration for Abba’s hit single). On July 8,
1815, Louis XVIII was restored to power.
Horologists may note that the period from March 20 through July 8 consists of 110 days,
not 100. And since we’re keeping score, FDR’s executive feats were actually
accomplished over 105 days. I suppose we can chalk these up discrepancies to the fact
that “100 days” just sounds snappier.
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of TIAA Global
Asset Management, its affiliates, or other TIAA Global Asset Management staff. These views are presented for informational purposes
only and may change in response to changing economic and market conditions. This material is not intended to be a recommendation
or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The
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conditions, political and economic developments.
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