US equity markets shrugged off the Republican’s failure to pass healthcare reform surprisingly well. Healthcare reform isn’t extremely important for the “Trump reflation rally,” and the expectation that focus will shift to tax reform has eased investors’ minds. We’re not sure such complacency is well founded. There are ~$500bn in cost savings that will now have to be “found” elsewhere in the federal budget—no small task, and something quickly being realized. But more importantly, the failure of healthcare reform demonstrates the difficulty President Trump will face in building a coalition out of a divided republican party. In addition, the Freedom Caucus’ successful defeat of the bill may embolden them to defy the Trump administration in other matters as well. As a result, we have continued to allocate our portfolios away from “Trump reflation rally” positions.
What makes the delay in policy implementation so important is that the Fed has already adjusted monetary policy as a result of the market reaction to Trump’s victory, hiking interest rates twice since the election, projecting two more hikes in 2017, and signaling that they intend to shrink their balance sheet this year. However, if expansionary fiscal policies aren’t forthcoming, it introduces the risk that the Fed is tightening policy too quickly. That risk can be viewed by both the recent flattening of the yield curve and in the decline in bank lending to corporations (shown on right). As a result of this environment, we feel that US equities outside of certain sectors no longer merit the valuation premium that they enjoy versus the rest of the world, and we instead favor international equities.
We have written extensively about the political backdrop in Europe this year, arguing that moderate candidates would prevail and have the chance to forge muchneeded reforms. This would represent a major tailwind for European assets, and we have positioned our portfolios accordingly. The most important election of the year takes place in France at the end of the month (polls shown on the right), and we expect to increase our European equity allocation if Emmanuel Macron can secure the presidency.
Past performance is no guarantee of future results. The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. Returns can vary dramatically in separately managed accounts as such factors as point of entry, style range and varying execution costs at different broker/dealers can play a role. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts are inherently limited and should not be relied upon as an indicator of future results. There is no guarantee that these investment strategies will work under all market conditions, and each advisor should evaluate their ability to invest client funds for the long-term, especially during periods of downturn in the market. Some products/services may not be offered at certain broker/dealer firms.
*Some Emerging Markets allocation overlaps with regional allocations.
**Individual account allocations may differ slightly from model allocations.
^Excluding GTA’s 7% alternative and cash positions.
JAForlines has been acquired by and operates through W.E. Donoghue & Co., LLC.
W.E. Donoghue is a registered investment adviser with United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940.
W.E. Donoghue & Co., LLC
Tel: (516) 609-3370