InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
FEBRUARY 1 , 2017
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
In this issue of IntelDigest, and for the next few weeks, we will focus on The Economy and Investing in the “New World Order.” We will start with a general overview today, and analyze specific sectors in the coming weeks.
Most market analysts expect that the Trump economic program will be positive for the American economy, in general. A particular beneficiary of Trump policies would be small-cap stocks, primarily because the Trump Administration intends to continue challenging other nations on the subject of “fair trade,” which could upset some trade relationships and invite retaliation against American multinational companies trying to do business in various countries.
Small-caps will have two advantages in the new environment: (1) they generally earn a larger percentage of their income in the United States, compared to larger companies and multinationals, and would be injured less by trade-related controversies; and (2) small-caps are less likely to be impacted by Trump-inspired U.S. laws aimed at large U.S. companies which have moved operations and jobs overseas.
Then there is the intention of Trump and the Republican-controlled Congress to lower corporate income taxes. This is another initiative which should be a greater benefit for small-cap stocks … small-caps have been paying higher U.S. tax rates for years compared to certain multinationals which could hide profits in foreign countries and avoid U.S. corporate income taxes.
Lower taxes will certainly improve earnings of small-caps, with an expected stock market boom as a result.
These factors, plus Trump’s commitment to reducing government regulation, have already spurred a rally in small-cap shares since the election. Investors are anticipating lower taxes, more favorable trade deals, less regulation, and pro-U.S. business policies which should be favorable for American companies.
Even before the anticipated corporate tax cuts, companies in the S&P 500 are expected to see earnings rise by up to 8% in 2017. With the tax cuts, forecasted earnings growth could be as high as 20%! Add to that the expectation that new tax legislation will give multinationals the opportunity to repatriate Billions of Dollars of profits at a low rate, and the outlook for U.S. corporations is looking positive for the next few years.
Economic optimism is now widespread, even if the new administration will likely be embroiled in political controversy for an extended period of time. Even so, American influence in global financial matters has not abated, Wall Street indices are close to all-time highs, and consumer confidence is at its highest point in 12 years.
At least from an economic standpoint, the uncertainty which accompanied Trump’s surprise election has gradually abated.
The International Monetary Fund (IMF) expects the U.S. economy to grow 2.3% in 2017, and 2.5% in 2018 … higher than its previous forecasts.
Other economic metrics support favorable growth forecasts. Inflation stands at just over The Federal Reserve’s target (2% per year), and crude oil prices are stabilizing. December housing starts jumped 11.3% to an annual pace of 1.23 million homes … for the year, housing starts rose 5.7%, the second-highest annual pace since 2008. Existing home sales rose 4.0% in 2016, and the supply of existing homes is now at a 17-year low.
The housing market should remain strong as long as interest rates remain relatively low.
On the negative side, not all sectors have a rosy outlook, and there are other areas of concern.
Several sectors rallied following the election, including multinational corporations in financials, industrials, and materials. These sectors have been characterized by lackluster or negative earnings and sales growth. Investors need to be wary about these sectors, and will have to work hard to extract the few diamonds from the mass of overvalued companies.
The strength of the U.S. Dollar over the last three years has cut into the bottom line of most U.S. companies doing significant business overseas. Even with the pullback in the Dollar this week, the stocks of the aforementioned financials, industrials, and materials are likely to be hurt as investors see that these companies don’t have the fundamentals to support the year-end surge.
There are serious concerns that the Trump controversies in non-economic areas could easily disrupt the financial world.
Both Chancellor Angela Merkel of Germany and China’s President Xi Jinping have openly warned the U.S. against pursuing protectionist policies. Clearly, big exporters like China and Germany want to protect their current trade surpluses
Trump’s aggressive first ten days in office have created more uncertainties which have halted the rise in interest rates and Treasury yields (now 2.48% on the 10-year).
Analysts have downgraded some multinationals, such as Coca-Cola (KO) and Procter & Gamble (PG), which were both downgraded to a “sell” rating by Goldman Sachs. We would expect downgrades of most multinationals in the coming weeks.
Then there is the daily barrage of extreme nonsense from the White House which is likely to put investors and business owners in a state of unease going forward.
For example, is the U.S. going to build a multi-billion Dollar wall at the Mexican border? The Mexican government claims that it won’t pay for such a thing, so the Administration put out a plan involving a border tax, which would ultimately put the American consumer on the hook for the cost.
From a Republican retreat which brought together the President and
Congressional Republicans, The Wall Street Journal reported that the executive and legislative branches “struggle to understand each other.”
The downside of such spectacles is that they can quickly erode the confidence of Corporate America … will business owners go forward to hire more workers and expand their businesses in such an environment?
By the way, a major impediment to economic growth could occur in March when the Congress and President have to seriously consider raising the Debt Ceiling … that promises to be a donnybrook for the ages!
The bottom line is that the economy is looking up, at least for certain stocks in certain sectors, but there is a high probability of confusion and controversy in the next 90 days. It is a stock picker’s market, so we’ll use a good deal of digital ink in the next few issues to discuss the areas where opportunities lie in the immediate future.