Companies Bracing for Disappointment, Zatlin Says

The following is a summary of our recent interview with Andrew Zatlin, which can be accessed on our site here or on iTunes here.

For several months now, we have been discussing the large divergence between economic reality (hard data) and expectations (soft data) in the wake of Trump's election. This time on the show, we spoke with Andrew Zatlin of Money Ball Economics about where markets are currently and how this is likely to play out.

Sentiment Pulling Back

“Everything is priced to perfection,” Zatlin said. “It’s pretty severe when a company doesn’t beat … expectations at this point.”

Sentiment surveys have been wildly bullish, Zatlin noted. But we also need to pay attention to company expectations.

“A lot of this is sentiment, and companies were not suckered into the sentiment,” Zatlin said. “People were.”

In the third quarter of last year, a lot of companies were signaling that they were going to layoff employees if they didn’t see a change in the economy. Companies were signaling that things were getting worse, and they were starting to position for that.

“(Companies) like the rhetoric, they like the message, but they want to see what’s going to happen,” Zatlin said. “What I’m hearing is, there’s going to be a lot of disappointment going forward.”

Trump was elected with a mandate to accomplish several things. One was the repeal of Obamacare. After that play failed, companies have had to rethink their strategy.

President Trump now appears ineffectual and, as a result, we’re beginning to see sentiment pull back and readjust.


Data source: Bloomberg

Time Window for Trump Closing

This uncertainty about the direction of President Trump’s policies means companies are holding off investing. There was an expectation of a Keynesian move involving a massive, trillion dollar infrastructure plan. With that appearing to now be stalled, Zatlin believes we’ll see conditions deteriorate somewhat.

Demand appears to be close to peaking, Zatlin stated. A good example of this is what we’ve seen in the automotive sector, with demand appearing to have stalled.

“We already are seeing a slowdown,” he said. “I think we’re going to see the hard data get even softer. And that’s because of the auto industry.”

When we reach that flattening stage, which he believes is where we are right now, we will see things muddle along for a while.

“My concern is, the closer we get to a June timeframe without any new spending plan that Trump supposedly wants to put on the table, companies will start to pull back even more,” he said.

With visible demand in U.S. equivalent to last year’s spending plus a small amount, Zatlin expects that we may see companies begin to reduce their workforce at a faster rate going forward.

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