We have been talking about the “Plow Horse Economy” for quite a while now. Low interest rates designed to spur economic growth have been offset by other government policies that have acted as a “Plow” holding the economy back.
Market watchers have assumed that the November election would see a continuation of those policies. The general prediction was for slow growth, falling corporate profits, a possible deflationary spiral, and flat yield curves.
What a difference a week makes. The market shocked political prognosticators by standing those expectations on their heads.
Bank of America surveyed 177 fund managers in the week following the elections who say they’re putting cash to work this month at the fastest pace since August 2009.
The U.S. election result is “seen as unambiguously positive for nominal GDP,” writes Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett, in a note accompanying the monthly survey.
The stock market has reached several new all-time highs, moving the DJIA to a record 18,924 on November 15th, up 3.6% in one week.
Interest rates on the benchmark 10-year US Treasury bond have risen from 1.83% on November 7th to 2.25% today (November 17th), a 23% increase. Expectations for the yield curve to steepen — in other words, for the gap between short and long-term rates to widen — saw their biggest monthly jump on record.
WealthManagement.com says that
Global growth and inflation expectations are also tracking the ascent of Trump. The net share of fund managers expecting a stronger economy nearly doubled from last month’s reading, while those surveyed are the most bullish on the prospect of a pick-up in inflation since June 2004.
Investors are now also more optimistic about profit growth than they have been in 15 months.
Whether this new-found optimism is justified is something that only time will tell. In the meantime to US market is reacting well to Trump’s plans for tax cuts and infrastructure spending. Spending on roads, bridges and other parts of the infrastructure has been part of Trump’s platform since he entered the race for President. It’s the tax reform that could be the key to a new economic stimulus.
According to CNBC American corporations are holding $2.5 trillion dollars in cash overseas. That’s equal to 14% of the US gross domestic product. If companies bring that back to the US it would be taxed at the current corporate tax rate of 35%. The US has the highest corporate tax rate in the world. The promise of lower corporate tax rates – Trump has spoken of 15% – could spur the repatriation of that cash to the US, giving a big boost to a slow growth US economy.