The surprise election of Donald Trump as U.S. president has “thrown fuel on the fire in a setting that was actually quite ripe for renewed reflation.”
Prior to the election, Calamos Senior Vice President and Senior Co-Portfolio Manager Michael Grant estimates that the United States was “80% of the way through” a long deleveraging-dominated economic expansion. Trump’s reflationary policies accelerate the process.
Before Trump was elected, Standard & Poor’s 500 earnings for 2017 were in the $125 to $130/share range, and 2,400 was forecast for the S&P.
“That kind of earnings base, especially given the tax reforms alone that are being proposed, are easily achievable, if not higher. If you assume that the typical bull market in the past has often peaked at a multiple of 20, that alone can get you to 2,600,” Grant told Chuck Jaffe in a MoneyLife interview posted online today.
Grant was introduced on the show as one of the few money managers who anticipated a Trump victory. As head of the Global Long/Short Team in September, Grant authored a commentary called “Positioning for the Late Stages of the Bull Market 2017-2018” in which he wrote, "Populism has awakened government survival instincts and fiscal initiatives have broad implications across sectors. This could add to the reflationary impulse and bookmark the end of the deleveraging era (2008–2016)."
In the interview, Grant reaffirmed his expectation that there would be “some runway” for stocks to anticipate an improving earnings cycle through next year and possibly the second half of 2018. One of the key variables to the forecast is that Federal Reserve Chair Janet Yellen is likely to be very slow to tighten, intending to reflate labor similar to Trump’s stated objectives.
Reflation Without Recession
Reflation can happen without recession, Grant said. “There’s usually a big gap between economic recovery or expansion gaining momentum and the sort of end of cycle issues that normally bring on recession.”
Bull market peaks rarely happen before 12 months of an actual recession, he noted.
“There are a lot of potential outcomes on the table. After years of being excessively negative on the equity outlook, investors need to consider some more optimistic outcomes,” according to Grant.
The risk to be concerned about, Grant added, is fixed income risk.
Describing a traditional 60% equity and 40% fixed income portfolio as risk-on and risk-off, Grant said, “The scenario that I’m laying out is that increasingly that portion of the plan that’s considered risk-off may actually embody the real risk-on.”
Most investors have gotten the market “terribly wrong” since 2008 but they’ve survived because the bond bull market bailed them out. “If we’re right and the bond bull market is over, investors have to get the equity decision right in the next cycle,” Grant said.
Investment professionals, to hear more from Michael Grant, register for our webcast starting at 4:15 p.m. EST on Thursday, December 1. For more information, see this post.