Well, now that that’s over with, where to next?
Truthfully, I’m disappointed the Fed raised interest rates last week. I expected as much, though I saw reasons why a rate hike would be ill-advised and should have been avoided.
There are simply too many deleterious impacts on massively indebted U.S. consumers, American multinational companies slammed by the strengthening dollar and emerging market economies that have taken on trillions in dollar-denominated debt that’s getting more and more costly. Those impacts will come home to roost soon enough…
Now we’re supposedly on the march toward three more rate hikes in 2017. Maybe – though doubtful. But we shall see.
The stock market certainly got what it thought it wanted, then promptly went nowhere.
The dollar rallied.
Cheerleaders claim we’re on the road to even higher stock prices – never mind that rising interest rates have historically meant falling stock market valuations (more on that in an upcoming dispatch).
But we’re still left with the question: Where to next?
I have an idea, and you’ll want to own commodities if I’m right.
Having bullied Yellen for a rate hike, Wall Street is now waiting for the Day After – January 21. It will be like no other day after a presidential inauguration in modern history.
So many promises/threats are waiting to either unfold or fizzle. Which Donald Trump will show up to his first day on the job? Wall Street’s directional future depends on that answer.
The Threat of Stagflation
If Candidate Trump arrives, then we have economic challenges that will torment the market.
Immigrants who make up a goodly portion of the service-sector workforce will be rounded up and summarily dispatched back to their homelands – a massive disruption to restaurant back-of-house operations, the construction industry, agriculture, hoteling, landscape companies, etc. That’s inflationary and a significant brake on economic growth.
Chinese manufacturers/exporters face stiff tariffs as Candidate Trump executes his belief that China is manipulating its currency. That, too, is inflationary and will see China lash out with similar tariffs that hit U.S. exporters, leading to layoffs here at home.
U.S. companies also face punitive measures for trying to remain competitive globally by opening production facilities overseas (made all the more important because of the anti-competitive impacts of the strong dollar). That will hit corporate profit margins and lead to declining stock prices and job losses at home.
Meanwhile, infrastructure spending combined with proposed tax cuts means a fresh round of hell for budget deficits and America’s debt. That’s stagflationary because the rising cost of government debt payments takes productive capital out of the economy, while infrastructure projects dump money into the economy which will be chasing goods and services – i.e., rising demand (which will be happening even as all the other inflationary moves unfold).
So, Candidate Trump arriving to work on Day One could present quite the problem for stocks and bonds, since inflation erodes corporate profits and the value of current bond yields.
A More Moderate Approach
If Presidential Trump shows up, we have a slightly brighter path to tomorrow – though economic challenges still exist.
Presidential Trump will not provoke a trade war, saving America from another losing battle, while limiting inflationary stresses at home and saving U.S. multinationals from the pain of rapid profit deterioration (nearly half the S&P 500’s sales and profits come from overseas).
Nor will Presidential Trump deport 11 million illegal immigrants starting on the Day After, preventing mass pain across service-sector industries, inside American wallets and across the broad economy in general.
Nor will he impose punitive measures on American companies that are desperate to remain competitive in a modern global economy. That will preserve corporate profits and limit the impact on stock prices.
Presidential Trump will, however, pursue his infrastructure spending plan, no matter what. And that will be inflationary… which means it’s time to add “hard commodities” to your portfolio – and, in particular, industrial commodities, or “base metals,” as they’re called, such as copper, nickel, aluminum and whatnot.
The Winner for 2017…
Inflation will drive the price of commodities higher, as will increasing demand which will stem from U.S. infrastructure spending, since new roads and bridges and airports and whatever project is on the docket require an abundance of industrial metals.
One of the single best hard commodity opportunities for 2017 is the PowerShares Deutsche Bank Base Metals ETF (NYSE Arca: DBB), an exchange-traded fund (ETF) that, among its peers, has the best track record over the last five years.
This particular ETF is tied to copper, zinc and aluminum, and its returns are based on the performance of futures contracts in those three metals. As a way to gain basic exposure to rising prices for some of the most widely used base metals, this fund is fine.
As with all such hard commodity ETFs, however, the returns are impacted by the fund’s continual need to roll over the futures contracts it owns from one month to the next.
So that’s where we stand – Wall Street waiting to see which Donald Trump shows up. But whichever one it is, it’s a Trump who’s likely to be quite the tailwind for commodity investments.