The Current Financial Context
in the USA

Protect assets and let the profits run

By Jean-Luc Burlone

The “risk appetite” sentiment is strong. Markets reach new highs as consumers’ and investors’ confidence in the economy runs high. There is a strong belief that President Trump’s policies will generate a 3% economic growth by the end of 2018. (A 50% increase from the current growth rate.)

Both Canadian and US economies could benefit from the pledged investments in infrastructure projects and in defence.

Both Canadian and US economies could benefit from the pledged investments in infrastructure projects and in defence. US companies will see their liquidity increased by the dismantlement of costly regulations ($1.75 trillion/year) and by the substantial tax reductions. In addition, US manufacturing companies barely reach 76% of their production capacity. Hence, they already have room to increase their output without major investments, much to the relief of their CEOs and board members who hesitate to invest for the long run, considering the concerns and likely consequences of the Trump administration policies. The main concern is the lack of manpower and capital; both production factors will be needed to sustain the pledged economic growth. First, the labour market is short of the necessary workforce to allow a 50% increase in economic growth when the unemployment rate stands at 4.7%.

‘Second, the reduction in taxes will immediately reduce the funds available to finance infrastructure projects…’

Second, the reduction in taxes will immediately reduce the funds available to finance infrastructure projects, while the expected increase in tax revenue from new investments or spending will be spread throughout the following years. The likely consequences include a larger deficit, higher inflation, more interest rate increases and a credit contraction. Furthermore, the possibility that the American administration activates a commercial conflict is not fully discounted (if at all) in economic expectations and the ascent of protectionism will disrupt supply chains and weaken the global economy.

In this context, where risk appetite and the fundamentals are currently positive and headwinds loom ahead, the bull market will last for several months but after, nobody knows. Hence, prudent investors make sure they master the relevant data of the financial products (shares or bonds) they own or they make sure their investment advisor does.

‘…the bull market will last for several months but after, nobody knows.’

Seasoned advisers, however, work with a system they have developed and tested through many years of practice. Their thorough knowledge of the financial products in their clients’ portfolio allows them to protect assets and let the profits run.

Image: Sam valadi via StockPholio.net