The 2016 presidential election put Republican Donald Trump
in the White House as the 45th president of the U.S. and gave his
party control of both the Senate and House of Representatives.
Trump on Nov. 21 provided the initial details of his priorities as
president by releasing plans for his first 100 days in office. He said
he will seek to use executive orders to withdraw from negotiations
on the Trans-Pacific Partnership (TPP) trade agreement; cancel
environmental regulations related to energy production, including
“shale energy and clean coal,” in order to generate jobs; reduce
other business regulations; direct the Department of Defense and
Joint Chiefs of Staff to create a plan to protect U.S. infrastructure
from cyber and other forms of attack; investigate “abuses of visa
programs that undercut the American worker”; and impose a
five-year ban on executive officials becoming lobbyists after they
leave the administration and a lifetime ban on executive officials
lobbying on behalf of a foreign government.
While it was not discussed among his initial plans, Trump and
Republican congressional leaders also have continued to promise
that they will abolish the Affordable Care Act, or “Obamacare.”
Trump has offered reassurance, however, that a replacement plan
will keep key provisions such as ensuring health insurance
coverage for existing conditions.
If enacted, all of these measures could have economic and
market impact. While we believe there are short-term risks to the
economy, in part from speculation that Trump’s policies could be
potential obstacles to economic expansion, we do not anticipate a significant change to our long-term growth forecast.
Outside of the U.S., we think it will be important to watch
developments in elections and leadership changes in several
key countries, as all are likely to be factors in global economic
and market activity.
The first round of the 2017 presidential election in France will be
held in April, with a run-off election between the top two in early
May if no candidate wins an outright majority. Incumbent president
François Hollande of the Socialist Party announced on Dec. 1 that
he will not run for re-election, raising further questions about the
future leadership of this key European Union country. His party is
scheduled to hold a primary election in January, although it is not
clear now who the potential party candidates may be. Candidates
from other parties include François Fillon of The Republicans and
Marine Le Pen, leader of the National Front.
Chancellor Angela Merkel, the first female leader of Germany,
will seek a fourth term in elections next year, which must take
place between Aug. 23 and Oct. 22. Merkel will face opposition
in part from the nationalist Alternative for Germany Party, which is
represented in 10 state parliaments and has aggressively
campaigned against her immigration decisions.
China – the second-largest economy in the world – will hold its
19th Communist Party National Congress during the second half
of 2017. President Xi Jinping is expected to gain a second term
as general secretary and remain in power. We think he is likely to
continue policies that have included a widespread anti-corruption
purge that has had effects within the party as well as on Chinese
business and society. China boosted growth in 2016 through
stimulus measures aimed at infrastructure and the property
market, and again boosted demand for resources. We think
China will continue stimulus programs in an attempt to keep
economic growth at a similar level in 2017.
We now forecast U.S. gross domestic product (GDP) growth
will average 2.5% in 2017, up from 2016’s forecast growth of 1.6%. Inflation in the U.S. is running at an annual rate of 1.6%, which is within the Fed’s target of 2% inflation.1 We think inflation is likely
to increase to that level or slightly higher in 2017.
Consumer spending is a key component of the U.S. economy and its recovery since the global financial crisis. We think that situation will continue next year. Retail sales have increased 4.3% since October 2015,2 reflecting consumer optimism and slow, steady economic growth. Consumers showed increased confidence in the economy late in the year, as shown by indexes that have returned to levels not seen since the Great Recession.3 We think that sentiment is an indication consumers will continue to spend, especially now that the uncertainty of the presidential election has been resolved.
While jobs and job growth were major issues in the election campaign, the U.S. unemployment rate has fallen to 4.6%, the lowest in nine years. The latest unemployment rate also reflects a drop in the number of people in the workforce, however.4 Employment overall continued to trend higher late in the year in health care, professional and business services, and financial activities. Employment in other major industries – including mining, construction, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, leisure and hospitality, and government – has been little changed.
The popularity with voters of Trump’s pro-growth agenda may reflect
the difference between employment data and the potential for individual upward mobility in a job or lifestyle. Phil Sanders, CEO of Waddell & Reed Financial, Inc. and CIO of Ivy Investment Management Co., notes that the U.S. economy is growing and overall wealth continues to improve, but "there isn’t a lot of dynamic activity in the economy." That may add impetus to policies to create or recover jobs in the U.S. “Austerity is not a recipe for growth," Sanders says. "Spending creates jobs, corporate earnings per share and ultimately tax revenues."
We believe a focus on infrastructure spending from the Trump administration could slightly boost that economic growth. He
has highlighted his support for major improvements in bridges, highways and the nation’s energy infrastructure and electricity grid, and even promised upgrades in railroads, tunnels, airports, schools, hospitals, ports and waterways. While we think infrastructure spending in general is likely to have support in Congress, the extent still is unclear.
During his presidential campaign, Trump also promised a major overhaul of the tax code. "Corporate tax reform would be very positive for business sentiment," says Ivy Global Economist Derek Hamilton. "Trump has called for cutting individual taxes, he has supported infrastructure spending – all of these things could be positive for growth in the second half of 2017 and in 2018."
The impact of trade on the U.S. economy has come into question because of Trump’s comments during the presidential campaign and since his election. Although he has announced a planned withdrawal from the TPP, there have been few other details about trade policy. Hamilton says a token increase in tariffs on a specific item from a country such as Mexico or China or minor revisions to the North American Free Trade Agreement would not create worries about trade policy. "However, if we see across-the-board tariffs on many goods from many countries, that would be negative for growth in the U.S. and other countries as well," he says.
The Trump administration’s approach to trade could be important to emerging markets, where restrictive or protectionist trade policies would have a major impact. "Emerging markets are heavily geared toward trade," Hamilton says. If changes are modest and don’t impede growth, emerging market economies may continue to perform well, he says. Longer term, we think global growth
overall and individual company performance will continue to
be the key drivers for the emerging economies.
While the U.S. Federal Reserve (Fed) has indicated it will
increase interest rates at its mid-December meeting, probably by
0.25 percentage point, we think further hikes are likely in 2017. Fed
Chair Janet Yellen sent a strong signal of a December rate hike
during testimony to Congress’ Joint Economic Committee on
Nov. 17 when she said the economy is making solid progress and
an increase could come "relatively soon."
Trump made several critical comments about current Fed policy and
Yellen during his campaign. He has not called for her resignation, but
has indicated he will not reappoint her when her term expires in early
2018. There also are two vacancies on the Fed’s Board of Governors
and there could be other openings timed with, or leading up to, the
expiration of Yellen’s term. We anticipate changes to Fed leadership
in the future and think a more "hawkish" approach and higher interest
rates are likely as a result.
The short end of the U.S. Treasury yield curve (five years and
fewer) may be less volatile in the coming year because of the
Fed’s commitment overall to low interest rates, says Mark Beischel, Ivy’s Global Director of Fixed Income. However, longer term Treasury
rates may be more volatile in reaction to market uncertainty about
fiscal and monetary policies, he says, especially given the change in
the U.S. administration. He notes that the U.S. budget deficit is on the
rise and the supply of U.S. Treasury securities will increase with it, but
largely through Treasury bills in 2017.
Beischel also says high-yield credit is somewhat insulated from
any concerns with the new administration and trade. "High-yield
companies tend to go as the U.S. economy goes," he says. "Any
concerns in the credit market at this point relate mainly to three
areas: the Fed becoming more aggressive, with more interest
rate hikes than are priced into the market; a substantial rise in
Treasury yields; and political missteps that would have economic
Beischel says he thinks central banks outside the U.S. will continue
their current easy monetary policies. The recent strength in the U.S.
dollar will allow them to pursue more aggressive actions in the near
future, he says.
The organization of Petroleum Exporting Countries (OPEC)
agreed in late November to reduce production by 1.2 million barrels
per day (bpd) to a total of 32.5 million, marking the first production
cut in eight years. David Ginther, co-portfolio manager on Ivy Energy
Fund, says the agreement is an important demonstration that OPEC
countries again may be willing to act together when it comes to the
oil market. The quota reduction itself is a meaningful reduction in
supply, he says.
Ginther notes that the decision effectively puts a floor under crude
oil prices at about $50 per barrel. He believes the oil market has
reached a supply/demand balance and OPEC’s move will allow
current high inventory levels to fall more quickly. Looking ahead,
Ginther says, the price of crude oil could reach the mid to high
$60s in 2017.
Global oil demand has continued to grow and may increase by
1.2 million bpd in 2017 on top of the current total of 95 million bpd,
with the increase driven mostly by emerging markets. Ginther says
energy companies will need to make new investments in order to
meet supply requirements in the coming years, and higher oil
prices are needed to attract any new investment.
He says oil producers need to get projects moving again to meet
supply requirements as soon as 2018-2020. Capital spending was cut
by 50% in the last two years and hundreds of thousands of workers
have been laid off. Discoveries of new oil reserves totaled 2.8 billion
barrels worldwide in 2015, the lowest annual volume since 1954.5
Ginther adds that it will require higher prices and time for the industry
to get spending going and re-start or initiate new projects, and bring
back jobs. These factors mean output will be slow to recover versus
the stable demand growth worldwide, he says.
We think the financials, health care and defense sectors will remain in focus in 2017. In our view, a Fed
rate hike will provide a positive scenario for the financials sector. Financials tend to benefit from rising rates because
the interest margin expands, which in turn can create more profit, and improving economic activity typically points
to more loan demand.
- Financials: A less-intense regulatory environment may provide an
added benefit to the financial sector. For example, new Department
of Labor regulations related to fiduciary standards for financial
advisors — set to be implemented in April 2017 — may be delayed,
revised or dropped if not enacted before President Barack Obama
leaves office. The Trump administration also could repeal the
Dodd-Frank Wall Street Reform and Consumer Protection Act,
which put in place the most significant changes to financial
regulation since the Great Depression. The Act affects all federal
financial regulatory agencies and almost every part of the U.S.
financial services industry.
- Health care: Health care was hit this year by rhetoric about
drug pricing and increased regulation. The Trump election
victory prompted a rally in pharmaceutical sector stocks, since
that industry was an area of scrutiny for Democrats and had
absorbed pricing attacks. Similar factors have applied to
biotechnology companies. But we think pharmaceutical
companies can adapt to more scrutiny on their pricing.
Trump’s call to repeal Obamacare could pressure health care
services stocks, such as hospitals and other providers, which have
benefited from the law. Sanders suggests these stocks are likely
to be volatile since policy or legislative changes – and any
fundamental changes to the companies themselves – will take
time to develop.
From an economic perspective, a key question is what any
change in, or replacement of, Obamacare would mean to health
care premiums. “The increases in premiums in the last couple of
years have been a fairly significant drag on consumer purchasing
power,” Hamilton says. Any changes that cause more modest
increases in annual premiums could be positive for consumers
and the economy, he says.
- Defense We think defense stocks may perform well in the future
because we believe Trump will take a hard stance on national
security. We believe it is likely the defense budget will expand,
which bodes well for companies dependent on governmentfunded
defense contracts. That said, any new demand could
prompt pressure for lower contract prices.
Other areas to watch
1Source: Consumer Price Index, U.S. Bureau of Labor Statistics, October 2016
2Source: Retail Sales report, U.S. Census Bureau, October 2016
3Source: Consumer Confidence Index, The Conference Board, November 2016
4Source: Employment Report, U.S. Bureau of Labor Statistics, December 2016
5Source: Financial Times, “Oil discoveries slump to 60-year low,” May 8, 2016
Past performance is not a guarantee of future results. Investment return and principal value will fluctuate, and it is possible to lose money by investing. International investing involves additional risks, including currency
fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in the energy sector
can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy
companies in complying with environmental safety regulations. These and other risks are more fully described in a fund’s prospectus. The opinions expressed are those of Ivy Investment Management Co. and are not meant
as investment advice or to predict or project the future performance of any investment product. The opinions are current through December 2016, are subject to change at any time based on market and other current
conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage
in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.