“The Donald and capital markets” by Harold AGJ Davis of Prairie Crop Charts, Winnipeg

In recent weeks, American politicians and the US media have been suggesting that President-elect Trump be given the benefit of the doubt and that the wisest course is to adopt a wait-and-see posture. After all, he is still selecting his Cabinet and will not officially become President of the United States until inaugurated in January. These gestures are generous, well intended and imply that a pause for the holidays would be in order. However, the real world has not waited to start offering its responses.

Portfolio managers and professional investors make asset allocation decisions regularly. Global total return funds can alter their investment mix, shift assets and adjust their currency exposures around the world on a weekly basis.

Even the sluggards of Canadian institutional portfolio management rebalance their portfolios and adjust asset allocation on a calendar quarterly basis. This means that almost all global investors will have had to make decisions of some importance before Mr. Trump takes the oath of office on Friday, January 20^th, 2017.

It is fair to suggest, “Let’s not be hasty.” However, consider a few of the changes that have unfolded in the four weeks since the US election. For example, US stocks have rallied because some believe that the Trump administration will be good for corporate America and equity values.

It is argued that promised top priority tax changes will lighten the burden on companies and permit them to repatriate profits that have been accumulating offshore. The prospect of higher dividend payouts and stock buybacks has some salivating in anticipation.

On the other hand, few of these bulls seem prepared to consider the medium term business consequences associated with the threatened abrogation (breaking) of trade treaties.

Another example concerns the cost of capital. A March 17^th, 2016 Montreal Analyst article titled “Pitching a curve in long term interest rates” described a 12 year old curved chart structure summarizing the recent momentum behaviour of the 35 year decline in bond yields. The curve has been definitively broken. Irrespective of when the Federal Reserve makes its move(s), the market pricing of long term capital has undergone a sea change. 

Long Treasury bond yields have risen by 100 basis points (1%) from their July lows and by 50 basis points (1/2 of 1%) just since the American election. It could be argued that the rout in bond prices is temporarily overdone, but this major chart development indicates we have already entered a new paradigm.

Internationally, events are unfolding too. Consider the 9% drop in the value of the Japanese Yen over the past four weeks. Is this strictly a US dollar play or what? OPEC is trying to stabilize crude prices by reducing production while Canada has approved pipeline projects to speed its oil to markets.

The French political landscape is cleaning out the old talents and presenting fresh unknowns. Monetary reform is traumatizing India. South Korea’s President has fallen, etc. Nobody can afford to adopt a “wait and see” strategy, and a lack of policy clarity in Washington casts a pall over an already anxious landscape.

The trouble with election campaign blather and bombast is that it adds to “fin de regime” uncertainties. Waiting for clarification might be justified or it could be wishful thinking and a huge mistake. Investors find themselves in an unfamiliar territory of surprising risks.

Historically, increased risk was typically compensated by the prospect for greater reward. For credit markets, suppliers of capital might demand higher interest rates. As for stocks, a higher return equates to a more generous earnings yield or E/P which is the inverse of a lower P/E. Thus, uncertainty is not good for asset values.

 To the contrary, some could argue that more conservative investment valuations will not be forthcoming as long as retirement portfolio contributions continue to outweigh withdrawals. However, the leading edge of the 1945-1963 US “baby boom” is already 71, next year’s new retirees were born in 1952, and a flow of funds tipping point lurks on the near horizon. Of course, pension fund withdrawals could be offset by ongoing generous monetary accommodation, but would equities necessarily be the best investment?

                                                Time will tell, but it waits for no one.

Harold AGJ Davis is the Author and Analyst at www.prairiecropcharts.com