Will Trump Election Usher in a New Economic Cycle?

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on December 2, 2016.

economiccycle

So much in life moves in cycles. Cycles are so common, in fact, that we oftentimes take them for granted — in day and night, the seasons, weather, biology, even businesses and the financial markets.

Over the course of a regular economic cycle, our economy expands and peaks before contracting and ending in a trough. Those four phases represent the natural rise and fall of economic growth that happens over time. The National Bureau of Economic Research (NBER) uses quarterly Gross Domestic Product growth rates to determine economic (also called business) cycles, and our government tries to manage the economic cycle using fiscal and monetary policy. The goal is to strike a delicate balance: keeping the economy at a healthy growth rate that’s fast enough to create jobs for anyone who wants one but slow enough to avoid too much inflation.

The phases of the economic cycle

Savvy investors understand this cycle and how each phase has different economic fundamentals that affect sectors of the economy — broad categories, such as technology, healthcare, telecommunications and energy, to name a few — in different ways. Some sectors and investment asset classes — equities (stocks), fixed income (bonds), cash equivalents (money market instruments), real estate and commodities — will thrive during a certain phase of the economic cycle while others will struggle. As the economic cycle moves from one phase to the next, investors rotate their capital out of existing sectors and asset classes into the next group expected to thrive in the new phase of the economic cycle. Rotation in the markets happens as a result of the process of always investing capital in the strongest performing sectors of the economy.

Wouldn’t it be nice if the economic cycle occurred with as much regularity and predictability as Mother Nature’s cycle of seasons? The calendar tells us when to expect winter — though this year’s fall was like an extenuation of summer! — but there is no economic cycle calendar that investors can use to know when to buy or sell any asset class. It isn’t quite clear and it isn’t easy, but investors can look at key economic data points for signs or clues that the economic cycle may be changing.

Many investors see Trump ushering in a new cycle

It appears that many investors see Donald Trump’s surprising presidential victory as an indication that the economy cycle may be changing. According to data provider EPFR, in the week ending Nov. 16, investors withdrew $8.2 billion from U.S. bond funds. EPFR also reports that stock mutual funds and ETFs had inflows of $44.6 billion in the seven days following the election. It appears investors are rotating from bonds to stocks. Since the election, U.S. treasuries have plunged in price as yields have soared. Remember the playground teeter totter? Think of bonds working like a teeter totter with price on one end and yield on the other. As price goes down, yield goes up. It’s been a wild ride on the bond teeter totter since Election Day’s 1.88 percent yield on the 10-year U.S. Treasury note to this week’s 2.32 percent.

Bond yields have been declining for basically the past 30 years. Everyone seems to be asking the question, “Is the 30-year bull market in bonds over?” Trump’s victory has certainly increased expectations for higher interest rates, more government spending and increased inflation, all of which are bad for bonds. The result is a significant likelihood that we have seen the 30-year top in bond prices. Investors recognize the clues and are moving their capital from bonds to stocks. Of course, it’s too soon to draw conclusions about President-Elect Trump’s economic plans and how they’ll sway on our economy despite the current rotation in the financial markets.

If you are wondering how the market rotation could impact your investment returns, I urge you to give your financial adviser a call.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors. Her column on women, families and building wealth appears every other Friday in The Tennessean. To learn more about her or her firm, visit www.capwealthadvisors.com.