7 November marked a year to the day that Donald Trump was handed the keys to the kingdom on the US. It's safe to say it's been a whirlwind ride since then. The equity markets however have enjoyed some much plainer sailing, but what lies ahead?
Break on through
Not for the first time this year, the S&P 500 has breached its all-time high - a fact that's easy to overlook given the negative headlines that have plagued the US's divisive Commander-in-Chief. Yet investors still seem content to price in many of his promises (tax cut, cash repatriation, deregulation, investment plan) and have benefited from a "Goldilocks" scenario: fairly strong growth with low bond yields and a weak dollar.
Promises vs. prices
Clearly, fundamentals remain impressive and some risks have passed - for now at least it looks less likely the Trump presidency will fail despite all the wailing and gnashing of teeth. The debt ceiling has been raised, at least until 8 December, and tax reform finally appears to be under way.
Tax cut fight
There will, undoubtedly, be some opposition to overcome - notably from small businesses - so changes are likely, but the GOP should still be able to pass a bill by the end of the year. This will be a huge relief to those investors who've been betting on deep tax cuts and driving the S&P 500 ever higher.
It will also be a huge relief to the President, whose policymaking apprenticeship has been troubled to say the least. After the healthcare debacle, he is in desperate need of a major legislative victory to conclude his first year in office. So far, the much-promised fiscal push has, rather ironically, met a bureaucratic brick wall.
Jerome joins Janet's dots
We do have the name of the new Fed Chair - the centrist, down-to-earth Jerome Powell will take office in February, once Janet Yellen's term comes to an end. Whilst not the most ardent proponent of de-regulation on the shortlist, Powell has stated his desire to lighten the regulatory load, especially on smaller banks.
He's also likely to tread the familiar, gradual path of normalisation laid down by his predecessor. At least, that's what the market - which received his nomination warmly - is hoping for. Continuity is king on Wall Street. Any deviation from that path could expose the true scale of the equity market's vulnerability to Fed balance sheet reduction.
Still, decent growth and little in the way of wage pressure is translating into solid margins, which in turn fuels firmer earnings per share growth as has been amply demonstrated by the results of the current earnings season to date. Positive surprises have been plentiful. In truth then, it‘s all suggestive of a very conducive environment for equities. And many investors do seem to believe the run will continue, at least for another 12-18 months until the economy starts slowing, because they can't see any more catalysts for change.
No more than neutral
Yet the S&P 500 is up by 20%+ over the last 12 months (at time of writing), which looks stretched to us. We're neutral overall on US equities and feel the need to be more selective than the headline figures suggest. Details on tax reform are sketchy, but the odds of an accord seem to have increased. Looming mid-terms add to the pressure for the Republicans. Sector calls are difficult at this stage, but we do expect domestic-focused areas to benefit most. We still favour large-caps over their smaller peers as well. We're bullish on banks over the long term, given the prospects for de-regulation, but low inflation could prove a headwind for a while yet.
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For professional clients and qualified investors only. Past performance is of course no guide to future returns.
Sources: Market data from Lyxor Cross Asset Research Team, 9 November 2017. First American Equity ETF - launched by Lyxor in May 2001. Flows data source Bloomberg, correct as at 16th November 2017
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