Mackenzie Minute: February 17, 2017
Todd Mattina, Chief Economist and Strategist on the Mackenzie Asset Allocation Team, discusses macroeconomic conditions and the Trump reflation trade.
So the Trump reflation trade – that is an overweight in US stocks and US dollar and an underweight in government bonds – has really had mix performance since the trade’s peak in late December. US stocks continue to do very well, but the US dollar’s given back about half of its gains since the surprise election of Donald Trump in November and the US 10-year Treasury rate is down by about 10 basis points from the peak. Markets appear to be re-evaluating the outlook given the uncertainty around Trump’s more harmful policies, particularly on trade and immigration, as well as his overall ad hoc decision-making process.
Donald Trump, however, has helped reinvigorate the reflation trade somewhat by promising a phenomenal tax reform, which could be announced in the next two to three weeks; although it’s really unclear if that aggressive timetable would really be politically feasible.
So we’re asking ourselves if President Trump’s economic program will be a historic shift in markets, much like the Reagan-Volcker years in the early 1980s or if it’ll just boil down to a short-term experiment in economic populism. Based on what we expect today and recognizing the huge uncertainty around these forecasts, we see US inflation and growth bumping higher in the next couple of years before fading and ultimately in the long run, average growth being even lower.
We’re also keeping a close eye on conditions in China and tightening macro policies, particularly if interest rates continue rising and if credit conditions tighten. And in Europe, we’re keeping a close eye on political risk including signs that populist and nationalist candidates will continue gaining ground in the polls, notably Marine Le Pen in France.
So macroeconomic conditions along with asset valuations and market sentiment are the building blocks for our tactical views and asset allocation and currencies in Symmetry. This process has helped us navigate our portfolios well through this uncertain environment. In terms of asset mix, we’re currently overweight stocks relative to bonds. While both stocks and bonds currently today look overvalued, stocks still look more favourably valued relatively speaking than bonds. Macroeconomic conditions are also more supportive for stocks, particularly because of the bump expected from Donald Trump over the next year or two.