Back To The Future: Trump And Trade

| About: Vanguard Total (VT)

By Brad Tank, Chief Investment Officer - Fixed Income

Insisting on the rules is not the same as refusing to play the game.

I spend a lot of time on the road visiting Neuberger Berman clients around the world. In June, I had the good fortune to be in London at the time of the "Brexit" vote. I was able to witness for myself this dramatic political event as it unfolded and also see it from the perspective of our clients. Earlier this month, I was in the Middle East at the time of the U.S. election. Again, I was able to experience another landmark event through the eyes of our clients.

As an American investor in the Middle East, clients sought my counsel on the implications of Donald Trump's victory. The latter part of my trip, therefore, was largely spent helping them lay out a road map as to what might happen next.

Both political parties made many wild promises during the U.S. election campaign - it's called politics and it's what people do when they want to get elected. But now that the gun smoke is beginning to clear, it's time to take a more sober look at how this could play out.

Those of us old enough to remember the Ronald Reagan years will recall a film called Back to the Future. Starring Michael J. Fox, it was the highest grossing film of 1985 and, reportedly, one of Reagan's favorite films. The reference to Back to the Future is instructive. Fast-forward over 30 years, and I believe where we are now has many parallels with the Reagan era. And I don't mean we'll all be driving DeLorean cars, although a recent press article indicated that this iconic automobile will come back into production in 2017, not in Northern Ireland, but in Humble, Texas.

Regime Change

In my opinion, Donald Trump's election marks a fundamental shift away from an era that has been dominated by central bank policy. In some respects, it accelerates a process that was already underway. People have been waking up to the limitations of monetary policy for a while now, but this represents a seismic shift away from that approach.

So what will replace it? The answer, I believe, is a much more business-friendly America, keen to generate growth, create jobs and, in some cases, generate a little more price inflation. Underpinning this will be a greater emphasis on fiscal policy to drive change. Witness, for example, the huge focus in the Trump program on infrastructure projects. Initially, there will likely be more attention to domestic issues, such as taxation and the reform (or repeal) of the Affordable Care Act. But in time, the focus will move overseas.

When I talked about these issues with our clients and colleagues in the Middle East last week, one of their biggest concerns was the potentially negative impact of a Trump victory on trade relations. In response, I told them to keep a close eye on the team that Donald Trump assembles around him.

Rock Star CEO

In my view, the appointment of Paul Ryan for a second term as speaker is a good first step. He knows how to operate the levers of power and is viewed as a unifying force. Indeed, he described his appointment as "the dawn of a new, unified Republican government."

But for greater insights into the issue of trade, I pointed them in the direction of a book entitled American Made. This was written by Dan DiMicco, chairman and former CEO of Charlotte-based Nucor, America's largest steel company. DiMicco is a rock star CEO who delivered a 720% return to shareholders over his tenure, from 2000 to 2012, in one of the world's toughest businesses. He also acted as Trump's trade adviser during the election campaign and is currently leading the transition team on all trade appointments.

DiMicco advocates the return of a more activist approach to world trade and commerce, similar to the approach that prevailed during the Reagan administration. He's not anti-trade; he simply wants other countries to play by the rules when it comes to trade agreements and he has been most vocal about this in relation to China. DiMicco is a key member of the transition team, so what he has to say carries much weight. His book provides many useful pointers as to what could happen over the next few years.

The DiMicco narrative is nothing to be afraid of. He's as much in favor of free markets and trade as any other business person. But he believes there should be greater controls and limits, as there were 30 years ago. And for those who remember the Reagan era, they'll recall that it ushered in a period of rapid growth and great economic prosperity, not just for the U.S. but internationally as well. Back to the future, indeed!

In Case You Missed It

  • U.S. Retail Sales: +0.8% in October
  • U.S Producer Price Index: Flat in October month-over-month and +0.8% year-over-year
  • U.S. NAHB Housing Index: Unchanged at 63 in November
  • Eurozone Consumer Price Index: +0.5 in October month-over-month and +0.8% year-over-year
  • U.S Consumer Price Index: +0.4% in September month-over-month and +1.6% year-over-year (core CPI increased +0.1% month-over-month and +2.1% year-over-year)
  • U.S. Housing Starts: +25.5% to SAAR of 1.323 million units in October
  • U.S. Building Permits: +0.3% to SAAR of 1.225 million units in October

What to Watch For

  • Tuesday 11/22:
    • U.S. Existing Home Sales
  • Wednesday 11/23:
    • U.S. Durable Goods Orders
    • U.S. New Home Sales
    • FOMC Minutes

- Andrew White, Investment Strategy Group

Statistics on the Current State of the Market - as of November 18, 2016

Market Index WTD MTD YTD
Equity
S&P 500 Index 0.9% 2.8% 8.9%
Russell 1000 Index 1.1% 3.0% 9.0%
Russell 1000 Growth Index 1.0% 1.9% 5.5%
Russell 1000 Value Index 1.2% 4.2% 12.9%
Russell 2000 Index 2.6% 10.5% 17.3%
MSCI World Index 0.1% 0.6% 4.6%
MSCI EAFE Index -1.5% -2.9% -2.8%
MSCI Emerging Markets Index -0.5% -6.6% 8.9%
STOXX Europe 600 -2.0% -3.3% -7.1%
FTSE 100 Index 0.7% -2.2% 12.8%
TOPIX 3.6% 2.5% -5.8%
CSI 300 Index 0.0% 2.4% -6.3%
Fixed Income & Currency
Citigroup 2-Year Treasury Index -0.3% -0.4% 0.7%
Citigroup 10-Year Treasury Index -2.0% -4.5% 0.4%
Bloomberg Barclays Municipal Bond Index -1.7% -2.5% 0.3%
Bloomberg Barclays US Aggregate Bond Index -1.0% -2.3% 2.5%
Bloomberg Barclays Global Aggregate Index -2.2% -3.8% 2.8%
S&P/LSTA U.S. Leveraged Loan 100 Index 0.1% -0.2% 9.0%
BofA Merrill Lynch U.S. High Yield Index -0.3% -1.2% 14.3%
BofA Merrill Lynch Global High Yield Index -1.0% -1.9% 11.9%
JP Morgan EMBI Global Diversified Index -1.8% -4.1% 8.7%
JP Morgan GBI-EM Global Diversified Index -1.2% -7.6% 7.3%
U.S. Dollar per British Pounds -2.2% 0.8% -16.5%
U.S. Dollar per Euro -2.6% -3.5% -2.7%
U.S. Dollar per Japanese Yen -3.7% -5.0% 8.7%
Real & Alternative Assets
Alerian MLP Index 2.1% 2.1% 13.1%
FTSE EPRA/NAREIT North America Index 0.3% -3.8% 1.5%
FTSE EPRA/NAREIT Global Index -0.7% -4.9% -0.1%
Bloomberg Commodity Index 0.8% -2.2% 6.0%
Gold (NYM $/ozt) Continuous Future -1.3% -5.1% 14.0%
Crude Oil (NYM $/bbl) Continuous Future 6.8% -1.1% 25.2%
Click to enlarge

Source: FactSet, Neuberger Berman LLC.

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