Peloton Wealth 2017 Q1 Recap & Outlook

The “Trump Bump” for stocks that began November 9th stalled in March but nonetheless managed to lift the S&P 500 6.1% in the quarter. The underlying fundamentals remain constructive for the broad market, and there are still many opportunities to invest wisely in specific companies. Ultimately, each company’s operational performance will be reflected by its stock price. (Companies that grow and generate profits for shareholders have stocks that do well). However, it certainly helps to have the backdrop of a generally favorable market environment.

The markets’ short-term reaction to President Trump’s election has been unquestionably positive. In the last Recap, I attributed this “bump” to the notion that stocks were overwhelmingly priced for a Clinton presidency, and the surprise Trump victory forced investors to rethink assumptions about taxes, regulations, and the economy’s growth trajectory. This resulted in an upward revaluation of stocks broadly. I also wrote that I thought stocks deserved to be higher post-election due to a higher likelihood of favorable tax and regulatory reform – if for no other reason than because lower taxes and less regulation would directly increase future profits.

The more important question now is whether the rally can continue, and we think that depends on the negotiation and implementation of campaign promises. I continue to believe that stocks might digest the recent gains by running in place for a period – rather than declining sharply. Stocks have risen very quickly since the election, so it isn’t surprising that the rally paused in March, but it probably also isn’t a coincidence that the rally faltered just as Republicans were bungling their repeal of Obamacare. To the extent tax reform or other sweeping reforms are held-up or fail, stocks could react negatively. However, the economy seems to be on solid footing and growing, so broad, pro-business reforms could provide additional lift rather than being a prerequisite for stocks to move higher from here.

While at Peloton our analysis focuses on the operating metrics of specific companies, it is often the geopolitical and macroeconomic news that dominates headlines and sets the tone for investors. This was clearly the case for the past six months, and nothing suggests it will be changing soon. Today, as always, there are positives, negatives, and unknowns. The balance, we believe, is positive for stocks.

The most important macro factor for stocks is the economy. Concerns about (another) Chinese slowdown may have weighed on stocks during the quarter, but those fears should be lessened by China’s reported 6.9% growth in the first quarter. China’s a huge economy growing very rapidly. Domestically, we’d be ecstatic with 3%, and we might get it with the right policies. The Fed seems comfortable with the plan to gradually increase the Fed Funds Rate, suggesting 3-4 rate hikes this year. Again, this wouldn’t be the case if Chairman Yellen and her colleagues saw economic warning signs. Housing in particular should propel the U.S. economy for years.

Geopolitically, the world is in uncharted waters. President Trump is like no president before, and other leaders and citizens will learn together in real-time how he governs. North Korea and its leader Kim Jong-un are not new problems, but the increasingly combative rhetoric is somewhat concerning. It will be interesting to see if the president can successfully leverage our trade relationship to convince China to get tougher with its rogue neighbor.