Is the equity rally running out of steam?

Since the election of Donald Trump, equity prices have soared as investors bet on an injection of fiscal stimulus from Washington through increased spending on infrastructure and a bout of tax cuts. Surveys asking people about how they feel about the economy show optimism, meanwhile hard data tells a much more subdued story. So, is the rally going to last?

The three biggest drivers of the US economy are housing, autos and healthcare. We’re seeing weak consumer spending in both the housing and auto industries, some of the major drivers of the US economy. With unemployment so low, we should see these sectors expanding robustly but that just isn’t the case – housing has stalled while autos have decreased. The US is 8 years into its recovery and while people have increased spending during this time disposable income isn’t having the effect on consumer spending that you would expect. Additionally, American’s are being asked to carry more and more healthcare costs themselves, which could erode some disposable income.

As history shows, there are limitations to growth which typically accelerates in the early stages of an economic cycle. Donald Trump’s plans to slash taxes and deregulate the financial sector would not be enough to deliver on his proposed 3 to 4% annual GDP growth at this late stage. There have been few examples of developed nations reaching a 1% increase in growth per year since the 1980’s.

US debt will expand to about 117% of GDP in a decade which will suffocate economic growth. High levels of personal debt as we veer into the end of the economic cycle will also put the brakes on economic expansion.

Low productivity in the US has hindered economic growth and this looks set to continue. Economic growth can spur from a growing workforce, however the aging US population and a clamp down on immigrants under the Trump administration means the workforce will retract.

Productivity and the labour market have been sighted as the main drivers of GDP growth.

Switching gears to energy markets, the shale revolution provides America with cheap natural gas. On the other hand, demand for oil, gas and fossil fuel is dropping – Saudi Arabia seems to be in a hurry to sell the public part of its oil company, perhaps a sign that the oil industry is saturated.