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A Singular Viewpoint

A Singular Viewpoint

John Hsu
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US Overview, March 7, 2017

The statement by Chair Yellen last week confirmed our belief since late last year that the Fed has finally started to normalize interest rates. Yellen’s announcement virtually assures a rate hike later this month.

Even though the language continues to be relatively moderate, advocating a gradual rise in rates to calm the market it should nevertheless be viewed as a ploy. Until such time that the yield curve is normalized, interest rates will be steadily going up.

Furthermore, as much as the Fed’s inflation target has been 2% it has already been breached. With minimum wages having been raised and unemployment being low, few believe that inflation is not on the rise.  This is especially relevant since we are beginning to have an idea about Donald Trump’s plans for the budget.

In the world of 24-hour news cycle, reaction should be almost instantaneous on worldwide markets. We also expect most global financial markets to follow the US.

After an explosive initial market rally, we believe that we are entering a consolidation phase. The length and depth of the consolidation will largely depend on President Trump’s budget. We then expect a follow-through of the bull market. We believe that the leadership will be in industries emphasized by the Trump fiscal policy, technological and earnings breakthroughs as well as companies benefiting from recovery in consumer spending. Cyclicals that have largely been ignored for a very long time will probably be rewarded by renewed infrastructure spending. It should also be noted that military spending will be high on the list.

Correspondingly, we are reminded that the bond market will continue to be under pressure as the Fed attempts to stay with the curve.
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