US Outlook 2017 – Paul Sirani, Chief Market Analyst at Xtrade

Political observers around the world were left startled by the election of underdog Donald Trump to the White House, and when the big-talking businessman is finally sworn in as the 45th President of the United States on January 20th, the world’s largest economy will fall under the microscope.

Whilst early and easy political victories, like confirmation of a Supreme Court nominee, a host of regulatory repeals, business-tax reform and a jobs bill is expected to create more positive momentum for the US economy and dollar, there’s plenty of uncertainty swirling.

Trump’s pungent cocktail of stalwarts, experts and conservative die-hards, mixed with his largely unknown economic strategy, must still entail a large uncertainty factor. For example, his nomination this week of Robert Lighthizer as the nation’s chief trade negotiator reinforces his determination to upend the prevailing wisdom (both inside and outside of his cabinet) of multilateral trade agreements and to focus on and enforce bilateral agreements.

Further, the political and economic promises that the incoming president has made look lofty, and following through on them all presents a major task. Trump’s general vow to alleviate taxes whilst balancing the books has come under some strong criticisms, while the large portion of his economic strategy is unknown or unfounded.

After four plus years of easy money and repeatedly overly optimistic growth predictions, the unleashing of tax and regulatory burdens will be extremely expansive. Take IPOs which had a historically awful year in 2016, or small businesses which are creating far fewer jobs than 20 years ago.

Various CBOE Implied Correlation Indices and the rolling 65-day correlation of the S&P 500 are at decade-lows. Stock pickers will benefit at the expense of passive index funds. The Telecom industry looks well placed to benefit from the reversing of some of the Obama-administration’s policies, due to industry consolidation and overall lower tax rates.

As for interest rates, if the US continues on the same path that led the Federal Reserve to raise rates in December, then we could be set for a number of hikes in 2017. In fact, Republican initiatives could arguably drive the Fed to take a highly aggressive approach to rate rises.

That could mean increasing debt burdens and possibly pinching growth. The question is whether growth-inspired fatter paycheques will keep consumer spending vibrant or if rising rates will begin to tell in earnest. Yet, with consumer confidence at its highest level since August 2001, spending looks set to continue for the foreseeable future.

If President Trump were to intentionally weaken the greenback, however, surprised traders would move into ‘risk off’ mode in nearly every asset class.

The big threat for the jobs market in the year ahead could be the increasing levels of automated work forces. Employment rates and real wage recovery continue to quiver under the threat of automation.

Possibly the biggest blow to the employment sector could fall on the nation’s 1.7 million long-haul truck drivers averaging $42,500 annually, especially if the sector suffers from disruption that has touched nearly every other industry.

As for a prediction on the roller coaster ride for the dollar, we expect a strong performance in 2017, though only partially for the right reasons.

We buy the consensus expectation that regulatory and tax relief will serve as drivers for increased investment in and productivity of the American economy.

With a lagging Federal Reserve response this will translate into a higher greenback.

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