RBC's chief US market strategist sees a 'continued upside' to stocks through 2017
Golub discusses President-elect Trump's economic policy, the market's response to Trump, and the sectors Golub is bullish on.
This interview has been edited for length and clarity.
Tina Wadhwa: Stocks on the whole have been rallying to all-time highs, with the Dow verging on 20,000. Have markets failed to price in the policy uncertainty of a Trump presidency?
Jonathan Golub: An all-Republican Washington holds the promise of a more market-friendly, pro-growth investment environment, including prospects for lower taxes, less onerous regulation, and fiscal spending. At the same time, the president-elect's rhetoric around trade and immigration would be a negative for the global economy.
Since Election Day, investors have been forced to handicap the success and mix of such policies. The market's behavior implies that pro-growth initiatives will be either more likely or more impactful than the anti-free trade portion of his platform. Given the substantial benefit to equities that would result from tax reform or regulatory relief, and the reasonably high likelihood that he will be successful in moving on these fronts, we see continued upside to stocks from current levels.
Wadhwa: Why did everyone's prediction with regards to markets go so wrong?
Golub: From the time that Trump first laid out his economic policies (before the Economic Club of New York) several weeks before the election, it was clear to us that the market's discomfort with his rhetorical style would give way to the benefits of his pro-growth agenda. What was surprising to us was how quickly the market came around to this conclusion.
Wadhwa: What does this signal about trading behavior?
Golub: Investors don't have the benefit of discounting certain outcomes, rather they are tasked with evaluating highly uncertain and often contradictory data. Given the disconnect between Trump's stated policy positions and those of the Obama administration, and the uncertainty on which specific Trump prescriptions will actually be enacted, we believe markets are behaving in an extremely orderly fashion. In fact, liquidity has been abundant, and the VIX (a measure of future volatility) has been quite low, indicating just how orderly things have been.
As with any new president, there is a level of ambiguity regarding which campaign promises will become actual policy. As much as Trump represents a different style of leadership, all indications are that the transition of power from the current administration will be smooth one. This is a bedrock issue of our democracy and there are few signs that this will be anything but normal.
Wadhwa: Will President-elect Trump's unconventional social media style have the ability to impact the markets?
Golub: There is no question that the president-elect's communication style, whether it be the nature of this rhetoric or the delivery through new media outlets, is different than that of past leaders. There is also no question that the market will be surprised periodically by Mr. Trump (whether in Tweets or elsewhere). However, the market will correctly judge his administration on policy, not 3am tweets.
Wadhwa: What sectors do you recommend? What sectors should we stay out of? Where should people be putting their money?
Golub: Financials (++): The group should see the greatest benefit from a mix of higher interest rates, reduced regulatory burden, and economic acceleration. We see Financials as the group most likely to benefit under Trump.
Deep Cyclicals (+): Energy, Materials, and Industrials should respond positively to a more favorable operating environment resulting from increased fiscal stimulus and greater business confidence.
Bond Proxies & Staples (-): Rising rates and accelerating economic growth should be a headwind to higher-yielding and lower-volatility sectors such as Utilities, Telecom, REITs, and Staples.
New economy stocks in general, and new economy technology names in particular, benefit far less from an accelerating economy. As such, we do not believe these stocks will react as positively. Given their strong fundamentals, however, we believe tech will likely perform in line with the market.
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