Brian Nick, Chief Investment Strategist, TIAA Investments
April 28, 2017
During his first 100 days in office, Franklin Delano Roosevelt had his entire cabinet sworn in as a group, signed into law 15 major bills, and began rolling out the New Deal, his program to combat the ravages of the Great Depression. Even though this time period constitutes just 7% of a four-year term, since FDR’s death in 1945 it has become—fairly or unfairly— the benchmark against which journalists and historians measure a new administration’s progress.
Brian Nick, Chief Investment Strategist, TIAA Investments
So how do voters feel about Trump after his first 100 days? According to an ABC News/Washington Post poll, not so good. His popularity rating stands at only 44%, the lowest of any president at this stage of his administration. (In an example of past polling not guaranteeing future popularity, Bill Clinton garnered the second-worst percentage, 59%, but won re-election.) Without question, Trump has come to realize that the learning curve for any new president is steep, much less for the first chief executive in American history never to have previously served in government or the military.
The president has taken his share of lumps. For example, his highly publicized executive order banning travel from certain Muslim-majority countries remains stuck in the courts, and the Republican’s effort to repeal and replace the Affordable Care Act has yet to even come to a vote on the House floor. Trump’s win column includes the Senate’s confirmation of Neil Gorsuch to serve on the Supreme Court, and the fulfillment of campaign promises to withdraw from the Trans-Pacific Partnership and initiate the process of building the Keystone Pipeline.
This past week, in a bid to boost economic growth, the White House unveiled a plan that, while notably short on specifics, would simplify the tax code and cut corporate and individual tax rates. Plans for a $1 trillion infrastructure plan are scheduled to be unveiled later this year.
During Trump’s tenure, U.S. economic data has been mixed. Encouraging “soft” data (such as consumer, homebuilder, and CEO sentiment surveys) stands in stark contrast to mostly tepid “hard” economic activity. Focusing on the former has helped the large-cap S&P 500 Index rise 10.4% since November 9, the day after the U.S. election. With their domestic tilt, smaller companies, as represented by the Russell 2000 Index, have surged 19.4% over the same time frame amid expectations for corporate tax relief, better economic growth, and a rising dollar. (A strong dollar hurts sales and profits of larger-cap multinationals by making their exports more expensive in overseas markets.) Both indexes have traded flat over the past two months, as higher valuations based on assumptions around the impact of future Trump administration policies have come into question.
The bond market, in contrast, has homed in on the economy’s actual performance, the hard data. Instead of continuing its fourth-quarter uptrend, the yield on the bellwether 10-year note has fallen in 2017. There are other reasons for the decline—including dovish minutes from the Federal Reserve and rising geopolitical tensions in North Korea and Syria—but for now, fixed-income traders harbor doubts over Trump’s ability to jumpstart GDP growth.
News that U.S. GDP grew at only a 0.7% rate in the first quarter will not have come as welcome news to the White House. Moreover, the number disappointed both our and consensus expectations of at least 1% growth, thanks to the weakest consumer spending contribution since 2009. At 70% of the economy, consumer activity has the ability to “make or break” the growth rate even if investment adds positively—as it did in the first quarter—and trade, which also contributed, albeit modestly, is no longer a drag.
Some of the lackluster spending may be seasonal in nature, with the warm winter leading to lower home heating costs. In this case, higher personal savings rates—which should bolster consumer balance sheets—coupled with robust consumer confidence and improving wage growth, may well trigger more robust economic activity over the balance of the year.
The market’s reaction to the GDP report was relatively muted. Most of this disappointment had already been priced in, as the softness during the first quarter became apparent in the past six weeks’ economic data. Despite the economy’s slow start, we maintain a growth forecast of 2%-2.5% for 2017 as a whole, with the risks for the year now skewed to the downside, due to the weak Q1 print. For 2018, our forecast still calls for 2.5% annual growth.
Among the week’s other releases:
Current updates to the week’s market results are available here.
Polls for the first round of the French presidential election turned out to be extremely accurate, and the April 23 result came in as expected. Center-left candidate Emmanuel Macron will square off on May 7 against right-wing nationalist Marine Le Pen. Notably, neither major party candidate made it to the final two, a sign of the economic and political frustration among the French people.
Global equity markets cheered the outcome, rallying hard on April 24 before gradually petering out. Europe’s broad STOXX 600 Index soared 4.4% for the week (in U.S. dollars), bringing its year-to-date advance to 12.2%. The S&P 500’s 1.5% gain lifted its year-to-date return to a healthy 7.2%.
Fixed-income markets, meanwhile, clearly expect a Macron win. (Current odds of a Le Pen upset are less than 15%.) Assuming that scenario unfolds, European sovereign bond yields could rise from current subdued levels, as investor attention pivots from the election and toward an improving European economy.
In the U.S., Treasury yields rose modestly during the week, supported by mostly positive corporate earnings releases and reduced fears of a government shutdown. (Yield and price move in opposite directions.) After beginning the week at 2.24%, the 10-year Treasury yield closed at 2.29% on April 28. In our view, a stronger economy, fueled by a significant increase in consumer spending, could lead to higher interest rates.
Returns for non-Treasury fixed-income “spread sectors were lower through April 27. High-yield corporate bonds, though, bucked that negative trend.
In France, another great leader is associated with a crucial 100 days in history, although his story did not end as favorably as FDR’s.
After escaping from exile on Elba, Napoleon triumphantly arrived in Paris on March 20, 1815. Having gotten wind of the former emperor’s return, King Louis XVIII fled the city. In June 1815, Napoleon was defeated by the combined armies of Europe at Waterloo, ending the Napoleonic wars (but providing the inspiration for Abba’s hit single). On July 8, 1815, Louis XVIII was restored to power.
Horologists may note that the period from March 20 through July 8 consists of 110 days, not 100. And since we’re keeping score, FDR’s executive feats were actually accomplished over 105 days. I suppose we can chalk these up discrepancies to the fact that “100 days” just sounds snappier.
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