Grant Urges Investors to Be More Optimistic—But About Equities, Not Fixed Income

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.

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    Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end fund performance information visit www.calamos.com. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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    Archived on November 22, 2017