Thursday, February 2, 2017

Washington’s Mud Pit

President Donald Trump has certainly hit the ground running. He is moving fast to implement his agenda and to deliver on his campaign promises. However, it isn’t only Democrats who are setting up lots of obstacles and even landmines to slow, if not stop, his momentum. Even the Republicans in Congress may be starting to rain on his parade so that his agenda will get bogged down in the mud that is a key feature of Washington’s treacherous terrain. This might explain why the stock market rally since Election Day through last Wednesday is showing signs of bogging down too.

A 1/27 Reuters article observed: “When President Donald Trump was elected last November, Republican lawmakers enthusiastically joined his call to rewrite the tax code and dismantle Obamacare in the first 100 days of his presidency. But as congressional Republicans gathered for an annual policy retreat in Philadelphia on Wednesday, the 100-day goal morphed into 200 days. As the week wore on, leaders were saying it could take until the end of 2017--or possibly longer--for passage of final legislation. Trump had a different idea when he spoke to lawmakers in Philadelphia, telling them: Enough talk. Time to deliver. The divergent views on the timetable were among many indications of tensions that simmered just below the surface at the three-day Republican retreat.”

Trump’s popularity rating was the lowest of any incoming president in the history of such polling. If it doesn’t improve quickly, Republicans may continue to drag their feet on implementing his controversial agenda. Already, some of them are questioning the need for and the cost of a wall on the border with Mexico, the impact of any new “border tax” that might raise prices to consumers and spark trade retaliation, and the advisability of completely repealing Obamacare.

No wonder the post-election rally has run out of momentum, as investors may be starting to worry that Trump is already running on increasingly muddy ground. Then again, it might be refreshing to focus on other issues that might also be important to the stock market. For example, how about:

(1) Earnings. Forward earnings rose to record highs for the S&P 500/400/600 last week. Among the S&P 500 sectors, forward earnings are at record highs for Health Care, Information Technology, and Utilities. They’ve stalled recently at record highs for Consumer Discretionary, Consumer Staples, Industrials, Materials, and Telecom Services. They are in cyclical recoveries for Energy and Financials.

(2) Commodity prices. The CRB raw industrials stock price index continues its V-shaped recovery since bottoming on November 23, 2015 after falling 27% from April 14, 2014’s high. It is back to the highest readings since October 2014 and only 7% below 2014’s high.

(3) European economy. In the Eurozone, real GDP rose 2.0% (q/q, saar) during Q4-2016, faster than the revised 1.6% expansion seen in the previous quarter, a flash estimate from Eurostat showed yesterday. The Eurozone Economic Sentiment Indicator (ESSI) rose to the highest since April 2011 last month. That’s a good sign for the growth in real GDP on a y/y basis, which is highly correlated with the ESSI.

In Europe, new passenger car registrations in the European Union plus the European Free Trade Association (Iceland, Norway, and Switzerland) rose to a record high of 15.1 million units last year. In the Eurozone, the volume of retail sales excluding motor vehicles edged down in November from October’s record high. This measure of sales volume is up 2.2% y/y, a solid increase.

(4) Consumer confidence. I average the monthly Consumer Sentiment Index and the Consumer Confidence Index to derive the Consumer Optimism Index (COI). In January, it held onto its big gain following Election Day. The COI current conditions index actually edged up to the highest since July 2007, while the COI expectations index moved ever so slightly lower.

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