Analysts in recent days got hit with two surprises: the election of Donald Trump and the stock market rally that followed. The overwhelming consensus was that Trump would lose and, if he actually won, stocks would tank. Professional forecasters got a lot of egg on their faces, including yours truly.
As Hollywood mogul Samuel Goldwyn once said, "Never make forecasts, especially about the future." With Goldwyn's famous malapropism in mind, here's a compass (instead of a crystal ball) to guide you in the week ahead.
The stock market's bounce since Donald Trump's shocking electoral triumph is in large measure born of expectations that a Trump administration will not only deregulate business and markets but also provide massive stimulus in the form of greater defense and infrastructure spending.
It's typically the Democratic Party that hikes federal expenditures, which explains why stocks historically do better under Democratic regimes. Paradoxically, the markets now expect the right-wing Trump to adopt Keynesian measures to prime the economic pump.
In this counter-intuitive context, promising investment opportunities now reside in the aerospace/defense and construction industries.
"Trump's election is very good for defense, at least in the short run," said Richard Aboulafia, vice president of analysis at the aerospace consultancy Teal Group. "He'll be eager to prove his national security bona fides, and to show that he wants to 'rebuild America's military,' whatever that might mean."
Aboulafia, a widely followed defense analyst, noted that Trump's planned military buildup currently lacks coherence. "Trump once said the U.S. Air Force must have 1,200 tactical jets, but it actually already has hundreds more than that," he pointed out.
Nonetheless, Trump's focus so far on equipment recapitalization implies a healthy procurement-funding boost, with double-digit increases over the next few years. Other countries will ramp up spending too, as they fear abandonment by an inward-looking America. That will benefit U.S. arms exports, especially of combat jets made by aerospace behemoths Boeing (BA) and Lockheed Martin (LMT) .
However, coupling a heavy defense spending ramp-up with the newly promised infrastructure spending package, and wide-ranging tax cuts, is a recipe for fiscal trouble, which is possibly one reason why 10-year U.S. Treasury prices suddenly skyrocketed after the election.
Higher defense spending, if it happens, comes at a price. If the economy is damaged by the promised abrogation of free trade pacts, and by a series of trade wars, the military spending splurge will be unsustainable.
Another source of apprehension is how Trump's divisive ascension to power will affect consumer confidence. After all, the Republican did lose the popular vote. The consumer and retail sectors have performed well this quarter, amid accelerating economic growth and falling unemployment. As Washington bitterly squabbles, will consumer moods remain buoyant?
On the docket in the week ahead are key economic reports that will provide clues to the durability of consumer spending's momentum: Retail Sales (Tuesday); Industrial Production (Wednesday); Consumer Price Index, Housing Starts, Jobless Claims, Bloomberg Consumer Comfort Index, and E-Commerce Retail Sales (Thursday).
Consumer spending in the third quarter was unexpectedly robust, led by greater car sales. A rise in wages because of a tightening labor market also is prompting shoppers to open their wallets. As the holiday shopping season gets underway, retail stocks are setting the stage for healthy gains in the fourth quarter.
Several consumer sector stalwarts are scheduled to report third-quarter earnings in the week ahead, including Wall-Mart (WMT) , Home Depot (HD) , Gap (GPS) , Best Buy (BBY) , Staples (SPLS) Target (TGT) , Ross Stores (ROST) , Abercrombie & Fitch (ANF) , and Foot Locker (FL) .
The average analyst expectation is that total earnings for the retail sector will rise 5.4% in the third quarter on a year-over-year basis, while revenues are projected to increase 5.3%.
This confluence of positive data, however, has spawned a phenomenon in the latter part of 2016 that's been rare in recent years: steadily rising inflation, which will give the Federal Reserve another reason to hike interest rates by the end of the year. Add the anticipated spending spree under a Trump administration and we're likely to see a move toward inflation-linked investments in coming weeks.
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