Authored by Scott Kristoff via Avondale Asset Management,
We started this year with the economy deteriorating and finished it with the second interest rate increase in ten years. There were a lot of ups and downs along the way, but ultimately 2016 was defined by three key story-lines: 1) Brexit 2) The Presidential Election 3) Fed Policy.
The first two events were votes that shocked the world. The stock market’s reaction to each was arguably even more shocking. If someone had told you in January that Britain would vote to leave the EU and Donald Trump would be president,would you have ever guessed that the Dow would be poised to break 20,000? Some people view this as a lesson in the unpredictability of markets. I would argue that the full story just hasn’t been written yet. These were major political changes that are likely to have enduring effects on the global economy.
In terms of Fed policy, there were two key moments during the year. The first was in February when the stock market’s decline caused the Fed to change its outlook that it would raise rates twice in 2016. That helped spur the market’s rebound. The second key moment was in June. The markets had fully recovered by then but that’s when Janet Yellen began to adopt a philosophy that “neutral rates” were going to be low for a long time. This shift in philosophy is probably the reason that we only saw one rate increase this year.
Happy Holidays!
January 7
The year began with the industrial economy deteriorating
“The environment continued to deteriorate as expected. The root causes for the slowdown remain the same. The rapid and sustained drop in oil prices, the strong U.S. dollar with its negative effect on export demand, and foreign exchange headwinds, are all negatively impacting broader manufacturing activity.” —MSC Industrial Direct CEO Erik Gershwind (Distributor)
But the consumer was still holding up
“Our holiday sales results were solid…We started off strong as we said at the third quarter announcement, but our performance continued to become stronger and stronger closer to the end of the holiday.” —Signet Jewelers CEO Mark Light (Jewelry)
January 15
Jamie Dimon emphasized that he did not see signs of recession
“We’re not forecasting a recession. We think the U.S. economy looks pretty good at this point…obviously, market turmoil we all look at it every day but I’m not sure most of the 143 million Americans look at it that much who have jobs and you have a big change in the world out there. People are getting adjusted to China slowing down…hopefully this will all settle down. It’s not the beginning of something really bad.” —JP Morgan CEO Jamie Dimon (Bank)
But a “psychological movement towards caution” was spreading as the stock market fell
“we’re seeing a little bit of a slowdown, or a psychological movement towards caution – that’s definitely happening, and that translates into maybe a little more down, in fact, and a little less robust bidding.” —First Republic Bank CEO James Herbert (Regional Bank)
January 22
Banks confirmed that the markets were overreacting
“There’s been a lot written and said over the last few weeks about the issues in the stock market. We believe there’s a lot of overreaction going on. It’s like you woke up January 2nd, all of a sudden everybody decided the world’s falling apart and we reject that. We don’t see any fundamental structural changes between the first part of December and the first part of January. The world just doesn’t happen that fast.” —BB&T CEO Kelly King (Regional Bank)”
Lower oil prices were viewed as stimulative to the economy
““in this instance, cheap oil is a net stimulative impact on U.S. growth. A WorldCom fraud was not beneficial for everybody else in the U.S. Telecom didn’t get cheaper. But fuel has gotten cheaper which is good for consumers” —Wells Fargo CFO John Shrewsberry (Bank)
January 29
Even though the markets were in turmoil, most indicators continued to look strong
“there has obviously been turmoil in the markets recently…Having said that, most indicators of the real economy at least in the US continue to look pretty strong…from our own portfolio direct indicators of consumer behavior like payment rates and purchase volume, and from leading edge credit indicators like delinquency flow rates. These indicators all look consistent…they are not giving us cause for concern.” —Capital One CEO Richard Fairbank (Bank)
Steel companies were calling out positive momentum. (Note: STLD +114%, CLF +507% since the date of these comments)
““Well, I think there’s positive momentum, generally. I’m sure Dick can speak to some of it, but the inventory overhang, there’s continued destocking there and it’s becoming balanced. It’s still relatively high, particularly in hot band. But in coated products, in coated sheet, I think it’s getting into a good position. And you speak to a seasonal uptick. I think we’re seeing that as well…On cold roll sheet and coated, I sense a tightness forming in that arena.” —Steel Dynamics CEO Mark D. Millett (Steel)
“I have been generally pleased with the preliminary duties coming from Washington on the steel trade case, especially the extremely punitive percentages placed on China…The impact of the trade case will be real and it has already been started to be realized by the order books of the clients, our clients at least, and we expect that only to improve.” —Cliffs Natural Resources CEO Laurenco Goncalves (Iron Ore)
February 5
Industrial companies had been in a recession for almost a year already
“we are now basically in our fourth quarter of the recession…I see at least one more quarter, maybe another quarter.” —Emerson CEO David Farr (Industrial Components)
Inventory depletion was near its bottom (Note: XLI +25% from this date)
“I would say what my knowledge is right now, inventory levels within the channel including ourselves, our levels that, they are pretty good levels, low…I don’t see much of a downward draft on that now. I think it’s pretty well over with, probably very minor downward draft.” —Emerson Electric CEO David Farr (Industrial Components)
February 12
Business leaders continued to say that the economy was doing better than Wall Street thought
“I mean, it’s funny if you turned off the stock market, you’d go these are great days around here…in all areas tenant demand, tenant attitude deal flow…rental rates etcetera up, up and up all good…What we are seeing in the stock market, we are not seeing in any of our underlying fundamentals of operating our properties.” —Douglas Emmett CEO Jordan Kaplan (REIT)
But risk aversion was back
“Risk aversion is back after a five-year hiatus” —Oaktree Chairman Howard Marks (Asset Management)
And capital markets were shutting down
“Look, the financing market is very difficult. I think in certain industries it is almost completely shut down in the non-investment grade market and I think the lower end, triple C lower single B rating market is very difficult to access than the public markets.” —Moelis and Co CEO Ken Moelis (Investment Bank)
However, Janet Yellen told Congress that she did not think the Fed needed to act
“We will meet in March and provide a new set of projections that will update markets on our thinking on the outlook and the risks. But I’ve not thought that a downturn sufficient to cause the next move to be a cut is a likely possibility. And we’ve not yet seen a shift in the economic outlook that is sufficient to make that highly likely.” —Federal Reserve Chair Janet Yellen (Central Bank)
February 19
The Fed did not believe that financial conditions reflected the economy
“a number of participants noted that the large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on U.S. economic developments.” —FOMC Minutes
But also signaled that they would take a wait-and-see approach to further tightening
“they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook…Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent” —FOMC Minutes
February 26
By late February many were viewing the stock market decline as a buying opportunity
“I go back to what Buffett says…he’s nervous when people are greedy, and he’s greedy when people are nervous. Well, right now people are nervous.” —Fluor CEO David Seaton (Engineering and Construction)
March 4
Business leaders continued with a relatively positive tone into March
“Business, I would say, is a little softer in many places, than people than I anticipated say four or five months ago…But, you know…overall the economy’s just kept movin’ up around 2%.” —Berkshire Hathaway CEO Warren Buffett (Conglomerate)
As long as interest rates stayed low, stock prices could continue to go up
“It does have the effect of making all assets more valuable. I mean, interest rates are like gravity in valuations. I mean, if interest rates are nothing, you know, values can be almost infinite.” —Berkshire Hathaway CEO Warren Buffett (Conglomerate)
But election risk began to come into focus too. Trump would sink the country into a prolonged recession.
“If Donald Trump’s plans were ever implemented, the country would sink into a prolonged recession…His proposed 35% tariff-like penalties would instigate a trade war that would raise prices for consumers, kill export jobs, and lead entrepreneurs and businesses to flee America. His tax plan, in combination with his refusal to reform entitlements and to honestly address spending would balloon the deficit and the national debt. So even as Donald Trump has offered very few specific economic plans, what little he has said is enough to know that he would be very bad for American workers and for American families.” —Mitt Romney (Son of former American Motors President, George Romney)
March 11
The consumer kept on spending despite stock market volatility
“In the US, park attendance, advance bookings all very strong, the advertising marketplace is much stronger than we expected it would be…we gave some numbers that were certainly indicative of either a consumer or an economy that was stronger than a lot of people had considered. So, we’re feeling actually fairly bullish about our business prospects in this market” —Disney CEO Bob Iger (Magic Kingdom)
March 18
The Fed decided not to raise rates in March even though it believed that risks had diminished
“let me say that, in recent weeks, I think the Committee certainly thinks that risks to the outlook have diminished…Our decision to keep this accommodative policy stance reflects both our assessment of the economic outlook and the risks associated with that outlook.” —Federal Reserve Chair Janet Yellen (Central Bank)
It began to feel like rates would stay low forever
“We believe that when the Fed started quantitative easing, it entered Hotel California. As the classic Eagles song concludes, “you can check out any time you like, but you can never leave.”” —Alleghany CEO Weston Hicks (Insurance)
March 25
By the end of March the market was getting back on track
“There’s nothing that would suggest that we’re imminently ready to go into a recession here in the U.S…I think the market is starting to recognize as well. So, things seem to be getting back on track in terms of even a market perception. So, I think that everything is being set up of for the type of year that we had thought it would be, in terms of the U.S.” —Ford CFO Bob Shanks (Automobiles)
Businesses were seeing a “resurgence of confidence”
“we saw some signs of a slowing down in our industry over the last several quarters, particularly as we got into December and January, but now we are feeling some resurgence of confidence, at least a flattening out of that trend. So hopefully that was a moment and hopefully we’ll see some growth develop in the quarters to come.” —Steelcase CEO James Keane (Office Furniture)
April 15
Still, growth was relatively uninspiring
“I think we still see the overall economy progressing in that 2%-2.5% range, kind of uninspiring growth.” —CSX CFO Frank Lonegro (Railroad)
“I think we still feel we’re…in the same low growth…environment that we’ve been operating in for a couple of years, not enough to make it feel like rates are going to move as a result of it but not enough to feel like we’re stalling either.” —Wells Fargo CFO John Shrewsberry (Bank)
“to me the outlook is less about any sort of explosive growth. The word I would use is potential for stabilization. So things have been at a low level.” —MSC Industrial CEO Erik Gershwind (Industrial Distributor)
April 22
Caution abated, but the environment still felt fragile
“many of the factors that were impacting the market in the first quarter…seem to have abated and although the market feels a little fragile from all that, it feels like – for the most part, that’s behind us. But we’ll see how the year progresses.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)
April 28
The oil industry was experiencing a “full scale cash crisis”
“Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels…our industry is now in the deepest financial crisis on record…This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turns” —Schlumberger CEO Paal Kibsgaard (Oil Service)
The market was focused on Brexit and a possible July Fed hike
“I think that the market is now pricing, that the Fed go probably in July and there is a high probability of that, that is being priced in the market and the market is not pricing a lot about the Brexit, so a negative event could really produce some correction in the market.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)
May 6
The economy was not rebounding as much as hoped
“The one surprise we had is in the last couple months we’ve seen the U.S. spending rate come back down again, which bothers us…I feel a little bit more worried about sales because of the U.S. marketplace in particular…this slow to start turning that nose up really bothers me.” —Emerson Electric CEO David Farr (Industrial Components)
May 13
Retailers reported poor results
“All of us have been reading the stream of negative news stories about various retailers over the past several weeks. Clearly, our industry is in something of a rough patch. We know we are not alone. But the consumer seems to be doing okay…We’re frankly scratching our heads. We see the same economic data you all see and it would point to a customer that would be spending more.” –Macy’s CFO Karen Hoguet (Mall Retailing)
May 20
But it appeared that it was an industry specific problem
“Obviously, the retail industry is going through a rather painful period of rationalization. Rarely have I read so many negative articles about our industry. Unlike much of what has been written, I don’t believe the consumer is the problem. I think our customer is in relatively good shape.” —Urban Outfitters CEO Richard Hayne (Apparel Retail)
May 27
Mastercard confirmed that consumer spending was still healthy
“I don’t think we see anything different really than what we said back when we had our last earnings call in our first quarter earnings call in April, right, I guess. So from a U.S. perspective…We don’t see that the consumer had a step-down in spend.” —Mastercard CFO Martina Hund-Mejean (Payments)
Brazil was the only place where the sky was falling
“I travel around the world a lot with our customers and I have seen nothing personally or heard of on my team that makes me think the sky is falling again anywhere but Brazil.” —Linkedin Head of Sales Mike Gamson (Social Network)
June 3
Capital markets began to reopen by June
“Capital markets have started to re-open a bit after a period of substantially lower activity.” —Goldman Sachs COO Gary Cohn (Investment Bank)
“I think there is some signs of recovery, if I look at the — month of IPO in the second quarter is larger than the total amount of IPOs in the whole first quarter.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)
June 10
But Janet Yellen was still shaken
“Over the past few months, financial conditions have recovered significantly…Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward.” —Federal Reserve Chair Janet Yellen (Central Bank)
June 17
In mid June Yellen capitulated on long term interest rates
“I’ve often…talked about headwinds that reflect lingering effects of the financial crisis…I think many of us expect that these headwinds would gradually diminish overtime and that’s a reason why you see the upward path for rates. But there are also more long lasting or persistent factors that may be at work that are holding down the longer-run level of neutral rates. For example, slow productivity growth…and we have an aging, aging societies in many parts of the world that could depress this neutral rate.” —Federal Reserve Chair Janet Yellen (Central Bank)
She started talking more about a low “neutral rate” and a new normal
“The sense that maybe more of what’s causing this neutral rate to be low are factors that are not going to be rapidly disappearing but will be part of the new normal.” —Federal Reserve Chair Janet Yellen (Central Bank)
Meanwhile, Silicon Valley was entering a “post unicorn” era
“I think we’re entering the post unicorn era and what I mean by that is when the market corrects, you have a shift from growth to all costs to a back to the basics and a focus on profitability. The scorecard changes.” —Dropbox CEO Drew Houston (Cloud Storage)
June 22
Yellen struggled with the economy’s long term prospects throughout June
“although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future.” —Federal Reserve Chair Janet Yellen (Central Bank)
July 4
We were travelling over July 4th so we compiled presidential quotes to help celebrate
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.” –Theodore Roosevelt, 26th President of the United States
July 8
We came back to a world in which Britain had Brexited.
We happened to be travelling in London. Here was our view of the scene:
“For what it’s worth, I attended a wedding outside of London last week and the political-mood was dour. The wedding was between two Oxford alums, so the guests were mostly well educated millennials. Almost everyone who gave a toast cited the “uncertain times” that we live in. The tone of the conversations that I had were pretty similar to what one might expect to hear in the US if Trump were to be elected in November (disbelief and distress). One cab driver that I had said that he might as well “light himself on fire” because “it would be less painful than the slow death his business will suffer” as a result of the vote. Still, hopefully any British readers can take solace in the fact that Britain has seen much worse times than these. Everything will turn out ok. It may just be a bit of a painful transition.”
People realized pretty quickly that Brexit was a process, not an event
“The situation is very volatile at this time. For sure, the period of uncertainty will be quite long whatever happens because even if the U.K. will leave the Euro, it cannot happen overnight, it will take at least two years. And the consequence of it will be much longer than two years. So, I believe that once the emotional impact is gone, things will settle down and we will have an idea of what is happening, but for now really — it’s really too early, too soon we have seen in the stores days — very good days, bad. So in a few months probably we will be able to say something.” —Walgreens Boots Alliance CEO Stefano Pessina (Pharmacy)
July 15
Brexit would likely lower British GDP but it was primarily a source of uncertainty
“So number one, we do think [Brexit] will reduce the GDP of the U.K. and the EU a little bit…Number two, we know that it is going to create uncertainty for an extended time period…We are hoping that political leaders are very sensible…I am not really worried about it. It would be nice if it doesn’t create a huge turmoil. So I am hoping the EU is sensible” —JP Morgan CEO Jamie Dimon (Bank)
July 22
The markets did not wait for resolution. They took off like a rocket.
“I think you could have sat there those couple days after Brexit and if you were forecasting the next month of activity, I think you might have been surprised if we could have known in advance that equity markets would rebound so strongly, there would be a rebound in currencies, and the world would sort of normalize” —Goldman Sachs CFO Harvey Schwartz (Bank)
Animal spirits had returned
“the animal spirits are back in North America” —Halliburton CEO Dave Lesar (Oil Service)
Had Central Bankers had finally succeeded in breaking the global depression psychology?
“The announced readiness of central banks to provide liquidity, if needed, and our accommodative monetary policy measures, as well as a robust regulatory and supervisory framework, have all helped to keep market stress contained.” —ECB President Mario Draghi (Central Bank)
We surmised that If this is true then the yield curve cannot possibly stay where it is. (10 Yr Treasury Yield: 1.56%)
“I personally think the flat rate scenario that everybody projecting is overstated. The underlying strength of our economy is not great, but it’s good. Fed, I believe, clearly knows they need to raise rates, and I think they will the minute they see a window, which could still easily happen at least one rate increase towards the fall.” —BB&T CEO Kelly King (Bank)
July 29
The reaction of markets to Brexit left everyone pleasantly surprised
“I think we were all pleasantly surprised…by how the markets have performed post-Brexit…I think we’ve probably…settled down a little bit quicker globally than probably people originally anticipated given the surprise of the vote.” —Lazard CEO Ken Jacobs (Investment Bank)
Companies saw very little impact
“As I said, we have no strong signs of Brexit so far.” —Volvo CEO Martin Lundstedt (Automobiles)
In fact, many companies were benefiting from a weaker pound
“With the recent weakening of the pound, exchange is forecasted to be a significant tailwind in fiscal 17.” —Diageo CFO Kathryn Mikels (Beverage)
August 5
Shortly after the dust settled we began to focus on our own elections
“going into the Presidential election, there’s a lot of uncertainty, there seems to be a lot of uncertainty around the world…So, I’m a little bit with you, I actually don’t think it’s going to be a huge finish to the year…I do look at the election as something that’s holding activity back quite a bit” —Ares Capital CEO Kipp deVeer (Business Development Company)
Election uncertainty kept everyone cautious
“we are look at a marketplace right now where people are being very cautious, they are being very careful with what they’re spending money on and they are very uncertain relative to what’s going on around the world from a political standpoint relative to just a business environment standpoint and where things are heading.” —Emerson Electric CEO David Farr (Industrial Components)
August 12
In mid August it looked like Clinton would almost certainly win
“We have some very unusual personalities involved in this election. I think they are giving people some concern. I am not going to predict the outcome. But you know, we’re obviously watching the polling very closely. And I think that the election is important, but I think the polling would suggest that we will be in reasonable shape in this election.” —Third Point Reinsurance Chairman Dan Loeb (Hedge Fund/Insurance)
The end of the election would be a positive catalyst for the economy
“Wherever I go around the world, I hear a lot of discussion about the United States presidential election. And I would say, seeing that one calm down, however, it is resolved, but seeing it calm down, I think will be an interesting and positive catalyst for our many businesses, and honestly probably for a lot of other markets as well, so that I would look for.” —Sothebys CEO Thomas Smith (Art Dealer)
August 18
In late August the industrial economy appeared to pick up
“around July…I think many [customers] had preventative maintenance productivity-type projects going…Now, as they’re back up and running…we see that brake fix demand coming through. And then…for those that would have planned downtimes…towards the end of the calendar year, they would be slating projects that would positively impact their uptime and their productivity.” —Applied Industrial Technologies CEO Neil Schrimsher (Distributor)
We also began to notice companies’ pricing power improving
“the pricing environment remains challenging…We expect stronger pricing in H2 though. We started to take selective price increases in some categories and geographies.” —Nestle EVP François Roger (Packaged Food)
August 26
The Fed began to feel more confident that inflation was increasing
” Employment has increased impressively over the past six years since its low point in early 2010…core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent–and the core consumer price index inflation rate is currently above 2 percent. So we are close to our targets.” —Federal Reserve Vice Chair Stanley Fischer (Central Bank)
September 8
And began to signal that it could raise rates in September
“I’m ready to talk about it… knowing what I know today, if the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting. So I, in no way, rule out September and look to December or look to even the November meeting.” —Atlanta Fed President Dennis Lockhart (Central Bank)
Even the oil industry was on the road to recovery
“I think the headline reads on the road to recovery. You have to look hard, but if you look at the headline, you’ll see on the road to recovery. But at the same time, I would describe this as sorting through the wreckage of the worst downturn that we’ve ever seen. We see the after-effects just about everywhere that we look.” —Halliburton President Jeff Miller (Oil Service)
September 16
But less than a week later Fed Governor Brainard squashed expectations for a September hike
“In today’s new normal, the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness. This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.” —Fed Governor Lael Brainard (Central Bank)
September 23
Lo and behold the Fed didn’t raise rates
“We judged that the case for an increase has strengthened, but decided for the time being to wait for further evidence of continued progress toward our objectives” —Federal Reserve Chair Janet Yellen (Central Bank)
Yellen relied on her “new normal” assessment to justify staying put
“we’re struggling with difficult set of issues about what is the new normal in this economy and in the global economy more generally which explains why we keep revising down the rate path.” —Federal Reserve Chair Janet Yellen (Central Bank)
She again cited a low neutral rate
“We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives. That’s based on our view that the neutral nominal federal funds rate–that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–is currently quite low by historical standard” —Federal Reserve Chair Janet Yellen (Central Bank)
Most companies continued to see an improving outlook though
“The good news for the Americas is that we had stronger orders in August and those have continued through the first three weeks of September…our backlog of high confidence opportunities in the Americas has strengthened for the second half of the year…we’ve seen recessions before in our industry and they are characterized by significant and sustained drops in order patterns. And that’s not really what we’re seeing this time.” —Steelcase CEO James Keane (Office Furniture)
September 30
The economy was getting closer to full employment
“businesses are getting closer to full employment and we are seeing the checks per client slow, but we expect that frankly for the last couple of years as people came back from recession.” —Paychex CEO Martin Mucci (Payroll Processing)
And inventory destocking was complete
“I think largely the destocking has occurred. And I think what will happen is the dealers and the larger distributors wind up having more line of sight to more demand. They are going to bring more inventory in…So, I really think as we move through ‘17, we are going to see some improvement in that general industrial market.” —Actuant CEO Randy Baker (Industrial Components)
October 7
Central Bankers continued to argue that they were not to blame for low rates
“Low rates are a symptom of the underlying economic situation. They reflect weak long-term growth trends and the protracted macroeconomic slump that has resulted from the crisis…the level to which real interest rates can eventually return when the economy strengthens is not determined by monetary policy. Instead, it depends on the economy’s long-term growth prospects. Productivity and demographics play a decisive role in this, and the development of these factors has not been favourable in Europe in recent years.” —ECB President Mario Draghi (Central Bank)
But voters were running out of patience
“the impatience with economic stagnation, especially among middle and lower income earners, is leading to dangerous populism and nationalism.” —Bridgewater CEO Ray Dalio (Asset Management)
October 13
We continued to see signs that pricing power was firming
”pricing has been low or negative for the past few years as a result of the benign commodity cost environment…As commodities have stabilized and start to turn up, we are seeing a return to more normal price inflation or in the case of Europe reduce deflation in some markets.” —Unilever CFO Graeme Pitkethly (Consumer products)
Meanwhile the Fed continued to ponder academic theory on neutral rates
“Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest–or r*–including lower productivity growth, demographic shifts, and an excess of saving around the world. Although several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth.” —FOMC Meeting Minutes (Central Bank)
October 21
There was a lot of anxiety leading up to the election
“I saw report a couple of days ago that 60%, or slightly less, but about 60% of the market it is really, really anxious about the elections. And I suppose we quite understand that. And so I think when all this subsides, however it goes, it will be less uncertainty and less anxiety, I think that will in still a bit more confidence then people will be a little bit more willing to invest, and make acquisitions and borrow money.” —BB&TCEO Kelly King (Bank)
And there were a lot of people sitting with cash
” people are being a lot more conservative than they have been in the past. They’re sitting on a lot of cash. They’re in a good financial position and as things begin to pick up…our customers will begin to invest more in the future as well as some of the new products and services.” —Comerica CEO Ralph Babb (Bank)
Investors were expecting a greater emphasis on fiscal policy and tax reform no matter who won
“As monetary policy reaches its limits in many regions, expansionary fiscal policy particularly in the form of infrastructure investments will be necessary to ignite economic growth.” —Blackrock CEO Larry Fink (Asset Management)
“I can tell you that I visit in Washington often and speak with members of the House Ways and Means Committee and the Senate Finance Committee and the tax staffs are busily working and working very collaboratively with U.S. multinationals on an appropriate tax reform package. We think there is more bipartisan support now than there has been in the past…we think that overall the climate for international tax reform post the election, quite frankly, is more positive than it’s been in the last year or so.” —Johnson and Johnson CFO Dominic Caruso (Healthcare)
However, one President was expected to bring more change than the other
“I also think a new President which is undoubtedly going to happen, has a slight variation one way or the other. I won’t talk about which one I think does which, but one gets a little more uncertain and causes us to stand back a little bit and wait to see how things settle. The other one is a lot more of the same and probably, whether we like it or not, is something we can manage because it’s the devil we know.” —US Bank CEO Richard Davis (Bank)
October 28
The economy definitely slowed in the weeks leading up to the election
“Yes. I’d just add that I spend a lot of time talking to executives of other companies and many of our clients and the elephant in the room probably is the election. Nobody really knows exactly what the impact is. They just know it is much different.” —Robert Half (Temp Staffing)
November 4
Businesses were waiting to see what would happen
“from many of our customers, we’re hearing wait-and-see and that’s pretty typical in an election year. I mean, that’s the one new thing I’d call out over the last quarter and it’s typical that it builds as you get close to November. So, I don’t make much of it either way. I don’t think any of our customers have a sense of what it’s going to mean for after. The only thing I think it means is that, we always say our visibility is low, it’s probably even a bit lower just because of the cautious perspective that many of our customers have.” —MSC Industrial Direct(Industrial Distributor)
Here’s what we had to say before the election:
I know that there’s a large contingent of investors who believe that the President doesn’t matter to markets, but if you study history, you know that nothing could be further from the truth. Almost all the significant turning points in market history have coincided with policy changes that were actively or passively set by POTUS.
November 11
Then, for the second time in 2016, there was a massive electoral surprise
“Last night, like so many of you, I watched the election returns with family and friends. And like so many of our fellow Americans – both Democrats and Republicans – I am stunned.” —Starbucks CEO Howard Schultz (Coffee)
A frustrated electorate wanted change
“We are going through a period of profound political and economic change around the world, and American citizens showed that deep desire for change in voting to elect Donald Trump as the 45th President of the United States. We have heard through democratic processes in both Europe and the United States the frustration that so many people have with the lack of economic opportunity and the challenges they face. We need to listen to those voices.” —JP Morgan CEO Jamie Dimon (Bank)
The result was expected to cause panic, but instead the market rallied
“We are definitely prepared to intervene in an emergency. What that will really look like, we must wait and see.” —ECB Governing Council member Ewald Nowotny (Central Bank)
Buying pressure had built up before the election
“the summer was a little bit of a pattern of the doldrums. Coming out of the summer there was a little bit more confidence…And there is a sense in the art market from lots and lots of consigners that we’ve had a long sort of not very exciting patch during the art market, and that they are looking for an opportunity to buy.” —Sotheby’s CEO Thomas Smith (Art Dealer)
Certainty provided a catalyst
“I think our experience over a long period of time is things that are distracting like the election, once there’s an outcome, certainty is a good thing. So from a positive perspective, having certainty on that is probably a good thing looking into the holiday.” —Kohls CEO Kevin Mansell (Apparel)
Here were our thoughts:
For the past eight years we have obsessed over the effects of ZIRP, NIRP and QE. Those days are now over…For now, most are expecting lower taxes, less regulation and infrastructure spending. However, while we can speculate about what is to come, it will simply take time for a clearer picture to emerge. The true framework of a Trump Presidency wont be discernible for at least several months. We’ll help chart that path as it emerges.
November 18
The end of the election unleashed a huge amount of pent up demand
“There is definitely pent-up demand. I mean, I think we have seen a big recovery in the U.S. consumer. That story has not been as robust for small business and it really gets to like lack of management confidence, lack of Board confidence, lots of uncertainty, they face the Affordable Care Act, they face an onslaught of regulation across all industry categories. And so I think the election, the beginning of the election is just behind us and there is an outcome regardless of the winner. And now I think the big thing is, it looks like there’s going to be an orderly transition of power and then the devil’s in the details in terms of what the new President’s policies look like, but anything that brings certainty brings confidence and there is a lot of dry powder…And there is a tremendous cash built across corporate America and I think there is a lot of appetite to invest in R&D, Company expansion, M&A” —JP Morgan Commercial Bank CEO Douglas Petno (Banking)
December 2
The year ended with a lot of positive hype
“we’re pleased to see a lot of positive hype around what’s going on with the Trump expectations, but we were positive moving forward [anyways]…Are we optimistic? Yes. Do we hope all the stuff we read about happens? Of course. And we’ve seen what the Australian elections have done. And we hope that same thing happens in the U.S.” —Jacobs Engineering CEO Steve Demetriou (Construction)
But it’s all speculation at this point
“anything that’s being talked about in media and anywhere else is obviously speculation at this point in terms of what may or may not happen. And so certainly internally, we are evaluating different scenarios…[but] at this point, it would be premature to talk about that publicly just because it would be pure speculation” —John Deere Investor Relations Tony Huegel (Agriculture Equipment)
December 9
The stock market has continued its remarkable run
“obviously, the stock has done unbelievably well since the election and I think it’s based upon the hope…that the Trump administration will be very good for kind of unleashed business per se and maybe improve the GDP and allow banks to do their lending and the banks will benefit a little bit both from higher rates and higher economic activity and possibly some reduced regulation. So, hopefully that will turn out to be true.” —JP Morgan CEO Jamie Dimon (Bank)
And that has helped boost business sentiment. Companies are ready to get down to business.
“the feel before the election was — it was materially slowing out there…All the discussions I’ve had with customers, suppliers, and with everybody out there, there is a high degree of optimism, and certainly my fellow CEOs…look if we truly are going to have tax reform that is really good…And we feel like every customer we touched since…they’re saying it’s going to be easier to do our jobs and we can get on with doing our jobs and that’s the general feeling…it does feel like people are just down to business now and down to business is a good thought for us.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)
Donald Trump sounds pleased
“[The Washington post says companies are unnerved…well] they’re so unnerved that the stock market is at an all time record since I’ve been elected…after I won the election, you see what happened. In the history of our country, there’s never been an up this big after an election, so I don’t know how somebody says that people are unnerved, it’s just the opposite. And frankly I think we’re going to go up. We have tremendous room, tremendous margin in our country, but we have to do things right.” —President Elect Donald Trump (Government)
December 17
Trump loves the bounce
“I’m honored by the bounce. They’re all talking about the bounce, so right now everybody in this room has to like me at least a little bit, but we’re going to try and have that bounce continue” —President Elect Donald Trump (Government)
But will he love Yellen? She doesn’t want to engage him but probably disagrees with his policies.
“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless, let me be careful that I’m not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy.” —Federal Reserve Chair Janet Yellen (Central Bank)
Her #1 concern is protecting the Fed’s independence
“I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation and that is what I intend to stay focused on and that’s what the committee is focused on.” —Federal Reserve Chair Janet Yellen (Central Bank)
In 2017 Trump will take office. Everyone is focusing on the “carrot” of his policies, but there will be a “stick” too
“we’re being stripped of our jobs…we’ve got to stop it… we’re reducing taxes very substantially for companies so they’re not going to have to leave because of taxes. We’ll be reducing regulations. Now those are the nice ways of doing it and everyone loves it and everyone’s happy…But when a company wants to move to Mexico…or another country and they want to build a nice, beautiful factory and they want to sell their product through our border, no tax…not going to happen that way. And the way you stop it is by imposing a tax…Now, I’ve come up with a number of 35%. There is no tax if you don’t leave. There is no tax at all…You know what’s going to happen?…Nobody’s going to move. They’re not going to move. They’re not going to leave. They’re going to stay here.” —President Elect Donald Trump (Government)