The Post-Election Environment: Observations and Outlook [Commentary]
The election of Donald Trump as the 45th president of the United States surprised most political pundits, as well as the financial markets. Trump’s campaign centered on growth-oriented policies that included tax cuts, infrastructure spending, a tax holiday for repatriation of cash held abroad, and a loosening of financial regulations. Healthcare reform, restrictions on immigration, and a protectionist trade stance were also among his priorities.
What the Administration will accomplish is unclear, but independent of Trump’s progress on policy, the U.S. economy has been resilient over the past few months.
- The economy is growing modestly (GDP increased 1.9% in Q4 2016, according to BEA’s “second” estimate) and corporate earnings are rising.
- Labor market conditions and inflation both are approaching the Federal Reserve’s target levels. On March 15, the decision-making body acted on its “confidence in the robustness of the economy” by raising its benchmark rate by another quarter-percentage point to a range of 0.75% to 1.0%. Chair Janet Yellen continued to emphasize a gradual approach to rate hikes, with two more projected in 2017.
- Inflation expectations have increased since the election, partly as a continuation of a longer-term trend, but also because the market views Trump’s infrastructure, tax cuts, and deficit spending plans as inflationary.
Against the backdrop of current market and political conditions, our outlook for spread sectors is positive. Modest growth in the economy, with the potential for upside, provides a supportive environment for credit. A continuation of still-low interest rates and expectations for gradual rate increases by the Fed may push out the credit cycle, extending a credit environment that is supportive for high yield in particular.
Staying the Course
Beyond the unfolding of Trump’s policies, we continue to closely monitor and anticipate global areas of concern. These include U.S. dollar strength, the path of oil prices, global economic growth, critical political elections, Brexit, and the eventual winding down of quantitative easing by the most influential central banks.
Newfleet has navigated and weathered many market environments. While prevailing circumstances may change, our time-tested process remains the same. We will continue to look for opportunities in all sectors of the bond market, seeking to uncover any out-of- favor or undervalued sectors and securities. Uncertainty creates opportunity, and our long-term performance record demonstrates that we have been able to take advantage of challenging situations.
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This commentary is the opinion of Newfleet Asset Management. Newfleet provides this communication as a matter of general information. Portfolio managers at Newfleet make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.