Tag Archives: economy

Clear Skies Ahead

Brian Wesbury of First Trust:

You know the old saying about every cloud having a silver lining? Well, if you listen to some of the financial press, you’d think their motto was that clear skies are just clouds in disguise.

Friday’s GDP report showed the economy grew 2.5% in 2017, an acceleration from the average rate of 2.2% from the start of the recovery in mid-2009 through the end of 2016. Notably, what we call “core” GDP – inflation-adjusted GDP growth excluding government purchases, inventories, and international trade – grew at a 4.6% annual rate in the fourth quarter and was up 3.3% in 2017.

However, some pessimistic analysts were calling attention to a drop in the personal saving rate to 2.6% in the fourth quarter, the lowest level since 2005. The pessimists’ theory is that if the personal savings rate is so low, consumers must be in over their heads again, so watch out below!

But this superficial take on the saving rate leaves out some very important points.

First, consumers don’t just get purchasing power from their income; they also get it from the value of their assets. And asset values soared in 2017 as investors (correctly) anticipated better economic policies. The market cap of the S&P 500 rose $3.7 trillion, while owner-occupied real estate looks like it increased about $1.5 trillion. That could be a problem if we thought stock market or real estate was overvalued, but our capitalized profits approach says the stock market is still undervalued and the price-to-rent ratio for residential real estate is near the long-term norm, not wildly overvalued like in 2005.

Second, the tax cut that’s taking effect is going to raise after-tax income. According to congressional budget scorekeepers, the tax cut on individuals should reduce tax payments by $189 billion in 2019, which is equal to 1.3% of last year’s after-tax income. So, consumers are going to be able to save more in the next few years, even if we don’t include the extra income that should be generated by extra economic growth.

Third, the personal saving rate doesn’t include withdrawals from 401Ks and IRAs, many of which are swollen with capital gains. So, let’s say a worker contributed $5,000 of their income into a 401K at the end of 1988 and kept that money in the S&P 500 ever since. Today they can withdraw more than $97,000 and spend it. When calculating the saving rate, the government counts every penny of that spending while not counting a penny of it as income. As the population ages and spends down wealth they’ve already made, the saving rate tells us less and less about the saving habits of today’s workers.

Sometimes good news is really just good news. Unfortunately, some analysts can’t look at clear skies without imagining clouds.

 

 

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Market Shakeout

Following a virtual non-stop rally in the stock market since the beginning of 2017, we are not particularly surprised that the stock market should stop and take a breather. What many people find disconcerting about this sudden drop is it’s steepness and breadth. We have not been exposed to a decline this steep for quite a while.

Some commentators actually blame good economic news for the market drop, claiming that a robust economy has triggered renewed inflation fears, which they assert will lead the Federal Reserve to raise interest rates faster than expected.

Our view is that there is nothing fundamentally wrong with the economy, or with an increase in interest rates which has been widely anticipated. Long-time market observers have seen this movie before, it’s just been a long time since we last saw it. From what we have been reading, some large institutions are employing trading systems that trigger large sell orders at certain levels in the market, which in turn causes a cascading series of further drops.

On a fundamental level, the stock market responds to the economy, and we see no indications that anything has changed since the start of the year. Hiring is up, wages are rising, and millions of people are getting bonuses that they haven’t seen in years. Take-home pay will go up for millions more Americans beginning this month. Lower corporate tax rates should lead to higher corporate profits which should lead to higher stock prices. Still other corporations that have billions of dollars parked overseas, like Apple, are bringing a lot of that money home and are promising to invest it in the U.S. economy.

While the recent free-fall in the Dow has been spectacular, the markets have been abnormally placid for about eight years now. A healthy market sees run-ups and pull-backs, and in recent memory the pull-backs have been on the maximum order of maybe 3% total. While we certainly prefer the markets always go up, the reality of long-term market history is that to have corrections on the order of 5% – 10% in the midst of a bull market isn’t unprecedented or even that unusual. We don’t think this pull-back signals the end of the bull market run, but rather that we might be getting back to a more historical norm.

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Revolution

Our favorite economist, Brian Wesbury of First Trust, comments on the changes taking place in the economy:

One word that could describe Donald Trump’s unexpected ascendancy to the presidency is – “revolt.” Revolt against the “establishment.” Revolt against the “status quo.”

After all, status quo bureaucracies, tax rates, institutions, regulations, and narratives promised prosperity, yet the economy was mired in slow growth and many felt it was hard to get ahead. Reliably blue states tilted red, and the pendulum swung the other way.

Since 1993, the top federal tax rate on US corporations has been 35%, one of the highest in the world. This has forced US companies to expand overseas. Both sides of the political spectrum knew it was a problem, yet nothing was ever done.

Now the rate is 21%, and full expensing of business investment for tax purposes is law. These changes will boost the incentive to invest and operate in the US, leading to more demand for labor, which means lower unemployment and faster wage growth, as well. From an economic perspective, this is a revolution.

But there’s more. We’re referring to the new limit for state and local tax deductions. That change, combined with a larger standard deduction, will launch an overdue revolution in the policy choices of high tax states as well as the geographical distribution of business activity.

California’s top marginal income tax rate is 13.3%. Under the old tax system, tax payers who itemize could deduct their state income taxes from their taxable federal income. So for the highest earners, the effective marginal rate was 8.0%, not 13.3%. [Deducting 39.6% of 13.3% saved them 5.3%. 13.3% minus 5.3% is 8.0%.]

Politicians in California could raise state income tax rates, and up to 39.6% of the cost would be carried by taxpayers in other states. The same goes for New York City residents, where the top income tax rate is roughly 12.7%.

Now taxpayers are limited to $10,000 in state and local tax deductions (with a 37% top federal tax rate). The financial pain of living in high tax states is now exposed. California and New York City – and many other high tax jurisdictions – look a lot less attractive than states like Texas, Florida, and Nevada.

This change may limit the measured income and wealth gap in the US between the rich and poor. California and New York don’t just have high taxes, they also have a high cost of living. So, if some high earners in these places leave to take lower pay in places with lower taxes and a lower cost of living, the income and wealth gap would narrow.

But incentives work on all institutions, and policymakers in high-tax states have massive pressure to cut tax rates.

Meanwhile, the Supreme Court is set to rule on Janus vs. American Federation of State, County, and Municipal Employees. Based on a similar case from a few years ago, it’s likely the Court will rule that all government workers (state, local and federal) will have a choice to pay union dues, or not. We know from experience that, when given a choice, many workers stop supporting the political activities of unions. This would be another force significantly altering the balance of power.

Whether you agree with these developments or not, the U.S. hasn’t seen economic policy changes like this in a long time. The forces that support markets and entrepreneurship over government control are reasserting themselves.

 

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Consuming doesn’t produce wealth, production does.

Our favorite economist, Brian Wesbury of First Trust just published and article discussing the Christmas shopping season and “Consumer Fundamentals.”  We changed his headline because there is something fundamentally more important in his comments, and it’s this:  consuming doesn’t make people wealthy, producing does.  No one ever got rich by sitting around consuming; people producing stuff is what makes communities, nations and cultures rich.

Now on to Brian’s commentary on the economy:

Now that Black Friday has come and gone and Cyber Monday is upon us, you’re going to hear a blizzard of numbers and reports about the US consumer. So far, these numbers show blowout on-line sales and a mild decline in foot traffic at brick-and-mortar stores. Both are better than expected given the ongoing transformation of the retail sector.

But Black Friday isn’t all that it used to be. Sales are starting earlier in November and have become more spread out over the full Christmas shopping season, so the facts and figures we hear about sales over the past several days are not quite as important as they were in previous years. Add to that the fact that this year’s shopping season is longer than usual due to an early Thanksgiving holiday.

But all this focus on the consumer is a mistake. It’s backward thinking. We think the supply side – innovators, entrepreneurs, and workers, combined – generates the material wealth that makes consumer demand possible in the first place. The reason we produce is so we can consume. Consuming doesn’t produce wealth, production does.

Either way, we expect very good sales for November and December combined. Payrolls are up 2 million from a year ago. Meanwhile, total earnings by workers (excluding irregular bonuses/commissions as well as fringe benefits) are up 4.1%.

Some will dismiss the growth as “the rich getting richer,” but the facts say otherwise. Usual weekly earnings for full-time workers at the bottom 10% are up 4.6% versus a year ago; earnings for those at the bottom 25% are up 5.3% from a year ago. By contrast, usual weekly earnings for the median worker are up 3.9% while earnings for those at the top 25% and top 10% are up less than 2%.

Yes, that’s right, incomes are growing faster at the bottom of the income spectrum than at the top. A higher economic tide is lifting all boats and helping those with the smallest boats the most. This is not a recipe for stagnating sales.

And so the voices of pessimism have had to pivot their story lately. Just a short while ago, they were still saying the economy really wasn’t improving at all. Now some are saying it’s a consumer debt-fueled bubble.

It is true that total household debt is at a new record high. But debts relative to assets are much lower than before the Great Recession. Debts were 19.4% of household assets when Lehman Brothers went bust; now they’re 13.7%, one of the lowest levels in the past generation. Meanwhile, for the past four years the financial obligations ratio – debt payments plus the cost of car leases, rents, and other monthly payments relative to incomes – has been hovering near the lowest levels since the early 1980s.

Yes, auto and student loan delinquencies are rising. But total serious (90+ day) delinquencies, including not only autos and student loans, but also mortgages, home equity loans, and credit cards are down 61% from the peak in 2010.

The bottom line is that investors should be less worried about consumer debt today than at any time in recent decades. Some think this could change if the Fed continues to raise interest rates, while selling off its bond portfolio. But interest rates are still well below normal levels and the U.S. banking system is sitting on trillions in excess reserves.

The US economy is less leveraged and looking better in recent quarters than it has in years. And better tax and regulatory policies are on the way. The Plow Horse is picking up its pace and consumer spending is in great shape.

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Monday Morning Outlook

Our favorite economist Brian Wesbury on the Economy:

GDP Growth Looking Good 

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 10/16/2017
Next week, government statisticians will release the first estimate for third quarter real GDP growth. In spite of hurricanes, and continued negativity by conventional wisdom, we expect 2.8% growth.

If we’re right about the third quarter, real GDP will be up 2.2% from a year ago, which is exactly equal to the growth rate since the beginning of this recovery back in 2009. Looking at these four-quarter or eight-year growth rates, many people argue that the economy is still stuck in the mud.

But, we think looking in the rearview mirror misses positive developments. The economy hasn’t turned into a thoroughbred, but the plowing is easier. Regulations are being reduced, federal employment growth has slowed (even declined) and monetary policy remains extremely loose with some evidence that a more friendly business environment is lifting monetary velocity.

Early signs suggest solid near 3% growth in the fourth quarter as well. Put it all together and we may be seeing an acceleration toward the 2.5 – 3.0% range for underlying trend economic growth. Less government interference frees up entrepreneurship and productivity growth powered by new technology. Yes, the Fed is starting to normalize policy and, yes, Congress can’t seem to legislate itself out of a paper bag, but fiscal and monetary policy together are still pointing toward a good environment for growth.

Here’s how we get to 2.8% for Q3.

Consumption: Automakers reported car and light truck sales rose at a 7.6% annual rate in Q3. “Real” (inflation-adjusted) retail sales outside the auto sector grew at a 2% rate, and growth in services was moderate. Our models suggest real personal consumption of goods and services, combined, grew at a 2.3% annual rate in Q3, contributing 1.6 points to the real GDP growth rate (2.3 times the consumption share of GDP, which is 69%, equals 1.6).

Business Investment: Looks like another quarter of growth in overall business investment in Q3, with investment in equipment growing at about a 9% annual rate, investment in intellectual property growing at a trend rate of 5%, but with commercial constriction declining for the first time this year. Combined, it looks like they grew at a 4.9% rate, which should add 0.6 points to the real GDP growth. (4.9 times the 13% business investment share of GDP equals 0.6).

Home Building: Home building was likely hurt by the major storms in Q3 and should bounce back in the fourth quarter and remain on an upward trend for at least the next couple of years. In the meantime, we anticipate a drop at a 2.6% annual rate in Q3, which would subtract from the real GDP growth rate. (-2.6 times the home building share of GDP, which is 4%, equals -0.1).

Government: Military spending was up in Q3 but public construction projects were soft for the quarter. On net, we’re estimating that real government purchases were down at a 1.2% annual rate in Q3, which would subtract 0.2 points from the real GDP growth rate. (1.2 times the government purchase share of GDP, which is 17%, equals -0.2).

Trade: At this point, we only have trade data through August. Based on what we’ve seen so far, it looks like net exports should subtract 0.2 points from the real GDP growth rate in Q3.

Inventories: We have even less information on inventories than we do on trade, but what we have so far suggests companies are stocking shelves and showrooms at a much faster pace in Q3 than they were in Q2, which should add 1.1 points to the real GDP growth rate.

More data this week – on industrial production, durable goods, trade deficits, and inventories – could change our forecast. But, for now, we get an estimate of 2.8%. Not bad at all.

I like the way he puts it: The economy hasn’t turned into a thoroughbred, but the plowing is easier.

 

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Hurricane Economics

With with the cleanup beginning from the effects of Hurricane Harvey and Hurricane Irma threatening the East Coast, We wanted to share the commentary of Brain Wesbury, Chief Economist at First Trust.

The hits keep coming. Hurricane Harvey left destruction in its wake, and now, Hurricane Irma has Florida in its sights.

It’s been five years since Hurricane Sandy, nine years since Ike and twelve years since Katrina. As with all major weather events, personal tragedy, pain, suffering, and loss are left in their wake. We have prayed, and continue to pray, for those affected. But at the same time, in our job as economists we look toward rebuilding and economic restoration. This is where investors often make two different mistakes about how these massive weather events will affect the economy and markets.

Some might think that, as did Nouriel Roubini after Katrina, the damage itself will cause a recession. Others take the opposite tack and think rebuilding efforts might actually help the economy. Neither are correct. By themselves, the storms will not push the economy off its Plow Horse path.

In the face of disasters we should all be thankful for the (mostly) free markets that help the U.S. respond. These markets allow accumulated wealth and know-how to focus on recovery. The losses will never be fully replaced, but the sheer size and flexibility of the U.S.’s capitalist system allows resources to be shifted and directed toward recovery. The price system makes this happen. While some think no profit should be made from a disaster, it is those profits which allow overall “economic” recovery to occur in relatively quick order.

Some estimate that damage from Harvey could be close to the $108 billion estimate for Katrina (2005), certainly above the $75 billion cost of Hurricane Sandy (2012).

Neither of these previous storms caused a recession, and at the same time, the data show no real acceleration in growth either. Real GDP grew 4.9% at an annual rate in the first quarter of 2006 after Katrina, but never accelerated above 3% in the first two quarters after Sandy. For six and nine month periods before and after these storms, growth rates were similar. In other words, it’s hard to separate the impact of Katrina or Sandy from normal statistical noise. The U.S. grew over 4% annualized in Q1 2005 and in Q3 2014, with no major weather impact.

But even if the bump in real GDP growth in the first quarter of 2006 was due to Katrina, that doesn’t mean it was good news. It would be what Henry Hazlitt in his book “Economics in One Lesson” called the “fallacy of the broken window” – which we recommend all investors read.

Hazlitt told a story about a vandal who broke a shopkeeper’s window, which caused a glassmaker to get an additional order. But the shopkeeper was planning on eventually using that same money to buy a new suit, so the tailor lost an order. In other words, even though rebuilding appears to create new economic activity, fixing things that have been destroyed actually robs an economy over time of the benefits of growth. Repairing physical capital does not generate new wealth, it only replaces old wealth.

Before Harvey, the market consensus was that automakers would sell cars and light trucks at a 16.6 million annual rate in August. Instead, automakers reported late on Friday that they only sold at a 16.1 million rate. Harvey hit an area that represents about 5% of US auto demand and it did so for about 20% of August. This suggests Harvey cut roughly 1% off of August sales nationwide, or that autos would have sold at a 16.3 million annual pace in the absence of the storm.

Automakers should make those sales back up in the next few months. In addition, reports suggest the storms destroyed about 500,000 autos, which will also generate additional sales in the months ahead.

These sales might help make the GDP numbers look better late this year or early next year, but it just represents demand that would have eventually appeared elsewhere in other sectors.

The lesson is that these disasters, while a tragedy in so many ways, do not shift the fundamental path of the U.S. economy. Some think socialist economies can respond better, but this is not true; markets are the most efficient system for guiding resources to areas in need. Free people that get hit with a disaster will overcome and reach new highs, because that’s what people do when they’re free, disaster or not. Godspeed to all those affected directly, and to those helping in recovery.

Our clients and friends in Texas were spared from the worst effects of hurricane Harvey.  Pray for those who lost their lives, their homes and their possessions.  And we applaud those who selflessly came to the rescue of their neighbors.  This showed the best of America.

 

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Good News on the Economic Front

Our favorite economist, Brian Wesbury of First Trust has a new note out that we wanted to share.

While the Sunday morning talk shows discuss the number of Civil War monuments that can dance on the head of a pin…and a rare Eclipse grabs focus…investors might be shocked at how the economy has accelerated.

Although we still have more than a month left in the third quarter, and many more pieces of data to come, as of August 16th the Atlanta Fed’s “GDP Now” model, which tracks and estimates real GDP growth, says the economy is expanding at a 3.8% annual rate in Q3.  If correct, that would be the fastest pace for any quarter since 2014.

We usually take forecasts this early with a grain of salt.  After all, a lot can happen over the remainder of the quarter.  And, on some prior occasions, the Atlanta Fed has projected rapid growth for a quarter mid-way through, only to ratchet back the forecast by quarter-end to a more pedestrian Plow Horse growth rate near 2%.  But, in this particular case, we think the pick-up is real.  In fact, our own internal forecast suggests the exact same growth rate of 3.8%.

One thing more pessimistic analysts are focusing on is that “inventories” are adding about 1% to the third quarter growth rate.  It looks like businesses are stocking shelves at a more normal pace after the lull in the first half of the year.  Excluding this inventory boost, First Trust models have real GDP growing at a 2.4% annual rate in Q3, while the Atlanta Fed model has it at 2.8%.

It’s hard to remember that the original report for Q1 real GDP was less than 1% growth.  That report worried many investors, and doom and gloom stories abounded.  But the foundation for continued economic growth remains in place.

It’s true that the US is unlikely to see tax cuts or real tax reform (or both!) anytime this year.  And this will make sustaining GDP growth at a 3.8% rate very difficult.  But we expect favorable changes in tax policy by early next year.  All that said, the best news is any threat of growth-harming tax hikes remains virtually nil.

Meanwhile, the one area of clear improvement in economic policy under President Trump has been regarding regulation.  The issuance of new rules that slow growth has basically stopped, while harmful old rules are getting rolled back or being reviewed for reform.  This alone can help push growth up by ¼ to ½ percentage point on an annual basis.

In addition, monetary policy remains very loose.  Short-term interest rates are still well below “normal” and there are over $2 trillion in excess reserves in the banking system.  We still expect another rate hike this year, and it seems clear that the Fed will begin slowly reducing the size of its bloated balance sheet.  Assuming the Fed starts balance sheet normalization on October 1st, their $4.4 trillion-dollar balance sheet would shrink by a measly 0.7% by year-end.  This takes the Fed from running a super-easy monetary policy to a very, very easy monetary policy.  In other words, any threat from tight money is remote.

Trade protectionism was the biggest threat to the economy as the new Trump Administration took office, but so far, there’s been a great deal more rhetoric than action on this front.  We remain confident that President Trump realizes a true lurch into protectionist policies would risk a drop in the stock market and would make it harder to meet his goal of faster economic growth.  Protectionist promises are much easier to break (or just ignore), when the unemployment rate is moving toward 4%.  Instead, expect the president to pivot toward trying to get better enforcement of intellectual property rights from China and an open market in oil and gas exports.

We constantly warn investors that one quarter, or one month, of economic data is meaningless.  So far, the Plow Horse has not morphed into a thoroughbred.  However, good news tends to lead to more good news and momentum is building.

Better economic growth means better profit growth and better profit growth will help push stocks higher.  Our 2017 end-of-year forecast of 2,700 for the S&P 500 and 23,500 for the Dow Jones Industrial Average remains in place.  Risks to growth remain low, and the chance of an acceleration remains positive as third quarter data is suggesting.

 

 

 

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The Trump Trade after three months.

The election of Donald Trump was followed by what many called “The Trump Trade.”  Based on the promises made by Trump during the campaign: to lower taxes and reduce regulations – two factors that inhibit economic growth – the stock market rose sharply.  But it’s going to take time and a lot of hard bargaining to actually get to the point where real economic benefits result.

Brian Wesbury, Chief Economist at First Trust:

As we wrote three months ago, it’s going to take much more than animal spirits to lift economic growth from the sluggish pace of the past several years. Measures of consumer and business confidence continue to perform much better than before the election. But where the economic rubber hits the road, in terms of actual production not so much.  It looks like real GDP growth will clock in at a 1.3% annual rate in the first quarter.

He says that we still have a “Plow Horse Economy” and it will take time to unhitch the plow and saddle up the “Racehorse.”

Trump has signed a number of executive orders that will have an impact on regulation, but the bureaucracy is still staffed with the last administration’s appointees and the pace of approving new appointments is glacially slow.

Waiting is the hardest part.

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Tectonic Shifts – Looking Ahead to 2017

The election has created tectonic shifts in government and promises to make bold changes in the economy.  We have been gathering consensus views from some leading financial analysts for 2017

  • Global interest rates are going up.
  • Global inflation is going up.
  • Global growth is going up.
  • Recession risk is going down.

A new consensus is also building.  The rise of nationalistic self-interest is upsetting the old order the world over.  For the past decade central bankers have been in control of economic policy throughout the world.  It has resulted in low or even negative interest rates in an effort to stimulate economic growth.  The result has been like pushing on a string.  Growth has been slow (the string as a whole hasn’t been moving) and the middle class in the developed world has seen their wages stagnate and their jobs disappear (the middle of the string) while those at the top (the far end of the string) have been virtually unaffected.  It’s part of the reason for the change in political leadership in the U.S. and the re-emergence of economic nationalism as evidenced by the Brexit vote in Britain.

As central bank leadership takes a back seat to aggressive fiscal policy, we can expect political leadership to focus on job growth and economic relief for the long-neglected middle class.  Domestically, here is what we expect to see:

Tax reform:  Trump’s campaign promised corporate tax reform.  To make American companies more competitive globally, he has proposed reducing corporate tax rates from 35% to 15%.  A special 10% rate is designed to repatriate corporate profits held offshore.

Individuals will be taxed at three rates depending on income: 12%, 25% and 33%.

Fiscal policy: The Trump administration wants to spend new money on infrastructure: transportation, clean water, the electric grid, telecommunications, security, and energy.

Health care: Trump wants to repeal and replace Obamacare.

Trade: The new administration has vowed to withdraw from TPP (Trans Pacific Partnership) and renegotiate NAFTA (North American Free Trade Agreement).  They also intend to challenge China regarding currency manipulation and unfair trade practices.

Immigration: President-elect Trump intends to establish new, tougher immigration controls to boost wages, build a wall along the U.S./Mexico border, deport criminal aliens and end sanctuary cities.

Economy: 25 million new jobs over the next decade is the goal of the incoming administration.  They aim to boost economic growth from 1.5% to 3.5% or 4.0% annually.

The Trump administration will focus on job creation, economic growth, infrastructure spending, reduced regulation, and energy independence while reducing governmental efforts to prevent climate change.  The people that Donald Trump has chosen for his cabinet are largely from the private sector; people that have backgrounds in running successful businesses and creating jobs.

These things are the primary reason that the stock market has reacted well to the election of Donald Trump.  Corporate earnings have been essentially flat for the past three years.  Professional investors see opportunities for renewed economic growth, which will increase corporate profits.  While we view this development with optimism, we always remain cautious.  We expect increased market volatility, especially if terrorist attacks continue throughout the globe.  We also expect interest rates to rise as the Federal Reserve brings rates to a more historically normal level.

We also see opportunities for the creation of new companies.  The number of publicly traded companies has dropped by nearly 50% since 2000.  At the same time, the number of companies that are held by private equity firms has grown explosively – by a factor of six!  This provides a great opportunity for privately held companies to go public and provide yet another opportunity for greater market growth.

As always, we remain cautious in keeping with our philosophy of preserving our clients’ capital.  Over the long term, we see the potential for a new American renaissance.

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The New Trump Economy

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.

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