The S&P 500 has roughly tripled since its low in March 2009 on the back of low and declining interest rates as well as unconventional and certainly unprecedented Fed purchases of U.S. Treasuries and mortgage-backed securities. Looking back to our January 2016 CEO Meeting, attendees concluded:
The past several years of low, even negative, interest rates in advanced economies created a monetary super-cycle that provided huge support to asset prices almost across the board, especially higher-risk asset classes. Looking back over 2015, many asset valuations reached their highest levels in several decades — making it relatively easy to make money. If you could sell, you sold. That period ended in October 2015 with the market expectation that the Fed would begin raising rates, which was followed in December by the first of what is expected to be a series of Fed rate increases in 2016.
The question is how much, if at all, have these views changed. The Fed raised the Fed funds rate only twice in 2016 and has thus far notched up Fed funds expectations by only a quarter of a percentage point in 2017. The Fed has hardly doubled down on tightening policy, although it has put its toe in the water.
The various U.S. stock market indexes performed well in 2016. The Dow Index is up 24 percent while the S&P 500 is up 12 percent. In both cases, about half of those gains were in place before the presidential election.
Global comparisons provide a more mixed picture. Trump may be good for advanced economies generally, but not so good for emerging markets. Trump’s election seems to have moderated pre-November 8 declines in Europe and tempered gains in many emerging market stock exchanges in Asia and Latin America (Chart 1).
Three U.S. sectors have clearly benefitted since the election: financials, telecommunications and consumer discretionary. Energy, industrials and materials all enjoyed good gains going into the election and, in some cases, have doubled their annual gains since.
Consumer staples and utilities turned in small post-election losses. Still, even health care and real estate, which were in the loss column going into the election, did a little better after the election (Chart 2).
Although Trump has rewritten the financial market conversation about growth and inflation, as well as the monetary and fiscal policies that underpin them, many of the dynamics that are driving financial markets today were in place before Election Day. These include better growth in the United States and abroad heading into 2017, especially in the manufacturing sector, rising commodity prices, and rising stock prices in both the United States and emerging markets.
The Trump bump doubled the Dow and S&P 500 index annual performance before it stalled out in mid-December and has added only modestly to global stock market performance. The Trump effect has fueled expectations, but since the start of 2017, U.S. stock markets have resisted moving higher, pointing to growing caution about actual economic and financial outcomes.
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