Market Expectations: Trump Bump or Slump?

05/16/2017 2:50 am EST

Focus: STOCKS

Jim Powell

Principal Analyst, Global Changes & Opportunities

The old adage, “Don’t count your chickens before they hatch” is especially good advice when predicting changes in the economy. Often the conditions that nearly everyone expects, don’t arrive, cautions Jim Powell, editor of Global Changes & Opportunities Report.

Another economic surprise may now be on the way — and it won’t be welcome. After several years of very slow growth, the outlook appeared to improve after Donald Trump was elected president.

Most analysts started to think the long-awaited recovery might finally be getting underway. The mood on Wall Street reminded me of Bourbon Street in New Orleans during Mardi Gras.

However, the encouraging economic numbers were mostly about rising consumer and business confidence. Millions of Americans who were happy with the Trump victory were becoming more optimistic about the future.

However, people weren’t actually making more money – and neither were most businesses that cater to them. Instead, the modest upticks we saw in retail sales came mostly from savings and credit cards.

The automobile rebound was stronger, but it was due largely to aggressive buying incentives and 72 month loans that lowered monthly payments.

Now, we are starting to see hard numbers come in from the first quarter – and many aren’t encouraging. Industrial production, retail sales, housing starts, default rates for auto and student loans, and even last month’s employment numbers were disappointing. In fact, retail store bankruptcies just hit a record.

The most troubling number of all was the 0.7% annualized first quarter growth rate, which was down from 2.1% during the final quarter of last year.2 Oops! The drop was more than a stumble. It was more like falling off a roof.

It’s beyond me how anyone thinks the economy can go from just seven tenths of one percent to three percent as the optimists expect this year. There is no such thing as pixie dust for an economy.

On the brighter side, many first quarter corporate earning reports show gains – but there is a catch with many of them. Several increases were due more to aggressive cost-cutting than to selling more widgets. Of course, only increasing sales can create long-term growth for a company – and the economy.

By this time next month, we’ll know more about how well our best-established businesses are doing. Projections about the global economy also appear overly rosy. Many measures suffer from the same pie in the sky expectations that we hear about US growth. In any event, if the powerful American economic engine doesn’t move into high gear, neither will the global economy.

I think the biggest factors that could boost US growth rest largely with Mr. Trump. If he is able to deliver on his promise to roll back business regulations, slash taxes, and spend billions on infrastructure, I’ll reach for my party hat and toot my kazoo. If not, I think today’s buoyant mood among investors will be replaced by something more realistic.

In other words, the Trump bump may be followed by the Trump slump. Although I’m not expecting anything like a recession, the economic gains we may see this year seem likely to fall short of the wonderful numbers the market has been expecting.  The bottom line for investors is clear.

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