President Donald Trump has been a sugar boost for markets, but he’s not a catalyst for sustainable growth, says Dan Farley, chief investment officer of investment solutions at State Street Global Advisors.
“The drivers of markets are fundamentals, not Trump policies,” Farley told delegates at the Investment Magazine Fiduciary Investors Symposium, held in the Blue Mountains, NSW, May 15-17, 2017. “The Fed is on a path and will raise short rates at least twice more this year. We think earnings growth is key in the US to justify higher valuations and drive stock markets.”
He warned, however, that equity and bond markets remain volatile.
Examining the impact of the “US’s first Twitter president”, Farley said Trump has been using those 140 characters in a specific way.
“It’s been an effective tool for him,” he said. “He’s maintained attention on what he wants, he’s managing the headlines and it’s played into the straight-talking image that he ran for president on. But we need to understand the diminishing marginal utility of this – people are getting used to him throwing out something outrageous – and also how the market distinguishes between the literal and figurative meaning of these tweets.”
Standard & Poor’s research on the impact of Trump’s tweets on the potential default ratings of companies showed that three out of five negative tweets were followed by the potential default ratings increasing the day after a tweet.
Similarly, positive tweets about an industry, by Trump, were followed by some “nice bumps in stock prices” in the sector – for example in the car industry.
But, in the case of both the positive and negative tweets, Farley said, the impact was quick and then started to mitigate.
“This also has a diminishing marginal effect,” he explained. “The tweets have taken on less of an impact than before. This is a short-term issue. Trump may have been a pop for the markets, but [his tweets are not a catalyst for] growth and sustainability of that growth.”
Influences on allocations now
Farley pointed to economic conditions, including the fiscal expansion happening around the world, and the fact, he thought, that the deflationary concerns have passed. However, he said the populist voting trend has not come to an end and that there is an inane dissatisfaction with the status quo.
“From an active risk point of view, this has all led us to be more risk seeking and we are about 8-10 per cent overweight in stocks, against government bonds on a global basis. There is a positive monetary backdrop, fiscal policy is coming in, and earnings are good. It’s a good environment for equities.”
The main driver of the overweight position in equities at State Street, he said, has been improving earnings sentiment. The biggest risk to that, he said, would be something happening in fixed income markets.
“The market is accepting a risk in rates over time; if there was a shock then it would create a challenge.”
Farley said the expectation is that there will continue to be mid-single digit returns across many asset classes, with fixed income in the low single digits.
“That’s very hard to work with to get towards outcomes we all want.”
In conclusion, he said, the Trump administration is evolving, and how it reacts and who’s in power and whom they rely upon is still coming out.
“The backdrop is improving but challenged,” he said. “It does favour equities but with a more modest return.”
Farley is based in Boston and oversees a team of more than 75 investment professionals managing more than US$180 billion in multi asset-class portfolios, including tactical asset allocation, liability driven investments and customised portfolios.