Risk-Market Rallies Meet Policy Implementation Realities

Risk-Market Rallies Meet Policy Implementation Realities

Risk markets, including stocks and high-yield bonds, have rallied strongly on the pro-growth promises of Trumponomics—President Trump’s fiscal, regulatory, and trade policy proposals. But will that momentum continue as the realities of policy implementation and other challenges set in? What signals are we watching and what strategies are we pursuing as this transition occurs?

Fed Stimulus May Have Aided the “Trump Bump,”
Fed Tightening Might Slow It

Trumponomics caused excitement about U.S. economic prospects, but economic conditions were starting to improve prior to November 2016. A long period of massive Federal Reserve monetary stimulus, in conjunction with extremely stimulative central bank policies around the world, preceded slow but significant improvements in U.S. labor and housing markets. China’s economy and oil also rebounded after downturns triggered a global financial and economic slump a year ago.

Trumponomics then unleashed an additional wave of optimism. But pre-Trump economic factors haven’t diminished in importance. We’re continuing to closely monitor global and U.S. growth, inflation, China, oil, and central bank policies, including the potential clash caused by the Fed tightening at the same time fiscal stimulus is being added.

Economic Growth Could Continue to Lag Expectations

We think growth could lag expectations because of fiscal policy implementation challenges, Fed tightening, inflation, and the potential impact of proposed immigration and trade policies. Economic growth scores in our global growth model are well below business survey scores (see below); the surveys may be over-optimistic, sending risk markets higher while government bond markets appear to be more mindful of the growth line.

Economic Model Shows Growth Scores Well Below Business Survey Scores

Global Survey versus Growth
Sources: American Century Investments, Global Analytics, Bloomberg.
Data as of 2/24/2017.

Check back for more insights as our discipline CIOs discuss how their teams are actively pursuing opportunities and managing risks in their CIO Insights this quarter.

Generally, as interest rates rise, bond values will decline. The opposite is true when interest rates decline.

The opinions expressed are those of G. David MacEwen and Victor Zhang and are no guarantee of the future performance of any American Century Investments portfolio.

For educational use only. This information is not intended to serve as investment advice.