The U.S. is moving toward becoming a tax haven, putting pressure on the EU and other countries. 2018 is likely to be the year of "maximum monetary stimulus." The economic recovery is the third longest in U.S. history. An increase in volatility is imminent. We still have a neutral weighting on equities, favoring European equities at the expense of very expensive US equities.
Tax reform and deregulation in the USA
Investors should not consider the combined effect of the tax reform and deregulations underestimate in the USA.
After decades of rampant overregulation and creation of an entire regulatory officer industry, the trend in the U.S. has turned, albeit slowly.
What if the U.S. becomes, at least temporarily, a tax and "deregulation paradise"?
This should again extend the already very old business cycle, boost corporate profits and increase chronically low labor productivity growth. If the economic recovery were able to save itself until 2020, a second Republican term in office would probably be likely. In the short term, the inevitable widening of the government deficit should be of little concern to the markets. The main thing is that the economy and profits grow.
Mike Pence president in 2020 or before?
Investors should therefore not focus so much on President Trump's unpopularity, especially in Europe, and should not be so quick to write off the Republicans and overestimate the (low) probability of impeachment.
Even if an impeachment were successful, Mike Pence would be promoted from vice president to president. This would abruptly collapse the "scandal frequency" and the whole administration would probably be able to work more effectively. The White House would probably become more "modest," more effective, but probably even more conservative. The blockade policy, even from within its own party, toward President Pence would probably be far weaker than toward President Trump.
The Trump administration could also benefit from the fact that - measured against the usual politician benchmark - an above-average number of promises were kept, or at least "aggressively pursued. The consistent behavior also includes, whatever one thinks of it, the promise to recognize Jerusalem as the capital of Israel.
Deregulation paradise in the USA exacerbates regulatory problem in Europe
While the Trump administration is much more firmly in the saddle than the consensus expects, the opposite is true for Mrs. Merkel.
President Steinmeier, who could probably be described as a "moderate socialist," is likely to be secretly happy about a weakened CDU/CSU and a weakened chancellor, as this suits the agenda of the "moderate socialists."
Germany and the EU are likely to slide further to the left. The EU is moving further in the direction of a super (supervisory) state that wants to determine, classify and regulate everything and is pushing back the forces of the market economy ever further. Actually, there are already only a few free-market oases left in a huge regulation-distribution and administration desert.
As the U.S. marches in the opposite direction of "deregulation" and is "almost a tax haven," the EU, which is drifting further to the left, is likely to come under increasing competitive pressure.
For the further development of the oil price, the "Trump deregulation wave" is significant insofar as Trump does not shy away from allowing almost all oil deposits to be exploited, even if they are located in the Arctic or in nature reserves or off sensitive coastal regions. Unfortunately, there is also the ugly face of deregulation, and not only the enormous productivity and cost advantages that result from the dismantling of completely unnecessary and expensive administrative requirements.
Peak Stimulus
Overall, 2018 could be the year of the greatest monetary stimulus. The Fed not only raised its key interest rates in 2017, but also started to reduce its balance sheet. However, the aggregate balance sheet of the 5 largest central banks continues to grow blithely, the ECB finally "only halved" its bond-buying programs as of January 2018, and the BOJ continues to stimulate diligently. Towards the end of 2018, however, the tide may slowly turn, when the ECB will also phase out its bond-buying programs.
Volatility increase ahead
Due to a less generous supply of liquidity by the central banks, volatility is likely to increase and one or the other price correction is likely to materialize on the stock markets, especially if economic growth were to weaken markedly.
Economic upswing reaches "Methuselah age" at 103 months
At 103 months, the current economic upturn in the USA is already the third longest in history. The longest upswing lasted 10 years. Another 17 months of upswing and a new record would be set. Due to the expansionary monetary policy until the end of 2018, the tax cuts and the deregulation measures, it is even likely that the current economic upswing will also be the longest in US history. Nevertheless, we are in the late cyclical phase and are likely to have at most another 1-3 good years ahead of us.
Exceptionally long, correction-free upward movement in 2017
In 2017, the S&P500 rose every month and there was not a single correction above 2%, which is very exceptional. There is a risk that market participants are becoming increasingly risk-blind after one of the longest equity rallies ever, and are too driven by fear of missing out. Sporting valuations, the Methuselah age of the economic recovery and the scaling back of monetary stimulus are issues that will preoccupy the financial markets in 2018. For 2018, we still remain optimistic about the global economy and expect growth of 3.5%.
Due to the relative valuation, we continue to favor European equities in 2018 at the expense of the very expensive US equities. We have a neutral weighting for equities overall.
Due to the unfavorable risk-reward ratio, we avoid high-yield bonds.
Last but not least: We consider the "US Government Shutdown" to be insignificant. Moreover, there is a good chance that an agreement will be reached in the next few days.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
Disclaimer: Produced by Investment Center Aquila Ltd. Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
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