• David Cockfield & Arthur Salzer

Politics, Politics, Politics

It seems as if the U.S. election campaign of 2016 did not end with the actual election. The U.S. media is filled with accusations of election wire tapping and Russian election influence, both now under investigation by Congress. In the meantime, little progress has been made on the legislation front. President Trump’s travel ban ran into constitutional road blocks from the judiciary. That and the unsuccessful restructuring of health care legislation have distracted the newly elected Republican dominated Congress from important economic initiatives, such a tax cuts and infrastructure stimulus programs. The first attempt at revising health care was voted down and has revealed major differences within the Republican Party itself. Some observers are questioning whether Trump’s other initiatives will fly. The President’s first attempt at a budget was also deemed a non-starter. In our previous Artisan issue we made the point that the U.S. Constitution was designed with all kinds of checks and balances so that no individual, including the President, or no group, including Congress, has complete power.

Given generally high valuations combined with political progress not advancing as fast as some expected, has caused equity markets in the U.S. to stall and even backtrack from their highs. However, financial markets, both equity and debt, handled the Federal Reserve rate increase very well. Investors need to step back and not let the fog of political infighting obscure the fact that the U.S. economy is continuing to grow. Unemployment levels are low and new job openings encourage those who have left the workforce to seek employment again. U.S. households, which are the basis of the U.S. consumption-focused economy, are in good shape and consumer confidence just reached a 16-year high. U.S. household debt, relative to disposable income, is at its lowest level since 2002.

U.S. corporate balance sheets remain in good condition and corporations, which for years have hoarded cash, are now spending. Durable goods orders in February rose 1.7% - this included aircraft orders. Even without aircraft orders core durable goods orders rose close to 5% on a annual basis. It would appear overall U.S. GDP growth in the first quarter could be close to 2% - not a bad start for the year.

Looking outside of North America there are positive indications that worldwide growth is starting to pick up, with Brazil, China and India having stable-to-improving growth prospects. Even Europe has been showing better economic progress lately. Unfortunately, political uncertainty still exists in Europe with Brexit ongoing and critical elections in France and Germany this year, where nationalist forces have been a factor threatening the basis of the European Union itself. In Canada, we had a Federal Budget that can be best described as a “wait and see what happens in the U.S.” budget. The Liberal government eliminated a few tax perks but didn’t increase the capital gains tax to 75% of gains, as many feared they might. Further increases in fiscal stimulus spending seem a little amusing as a recent budget review revealed slow progress in spending for previously approved outlays.

It does appear that threats of a U.S. border tax have had a dampening effect on Canadian business. Business investment spending is at the worst level in 25 years. On a more positive note, the Trump approval of the Keystone Pipeline will allow that project to proceed, which is good long term news for the oil sands sector. Recently a pull back in oil prices has slowed recovery hopes in Alberta and Saskatchewan, but fortunately B.C. and Ontario continue to show reasonable growth. Canada as a whole is likely to struggle to reach 1.5% GDP growth in 2017.

North American equity markets reacted positively to Trump’s promises of tax cuts and fiscal stimulus. As doubts have risen, markets have faltered but have not had a meaningful correction. How equity markets proceed from here will very much depend on the first quarter corporate earnings reports which seem to be at this point above expectations. We remain cautiously optimistic. With the potential to see one or possibly two interest rates increases over the coming year in the U.S. and possibly Canada, we continue to see opportunities across credit focused strategies which tend to hedge interest rate risk. In regards to income producing investments we favour private real estate (primarily US) backed debt which offer attractive and consistent cash-flows with short maturity exposure compared to publicly traded bonds. On the equity side, we continue to utilize a combination of global factor based and broad market ETF’s to provide diversification with a tilt towards providing lower volatility returns.

#DavidCockfield #ArthurSalzer


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