Markets Priced for Perfection, Sentiment Ahead of Actual Growth

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

Market expectations have driven stock prices to new highs, but with sentiment so extreme, many are wondering if this move is sustainable.

This time on FS Insider we spoke with Andrew Zatlin of Moneyball Economics about his take on market direction, the possibility for a near-term correction, and the need for Trump to make good on his promises sooner rather than later.

Soft vs. Hard Data

There’s definitely been a positive shift, Zatlin stated. The question is, will this shift prove sustainable, and will it translate into actual spending and economic activity?

All data points suggest sentiment is high right now. We’ve seen confidence boosted, and now we need to see that translate to actual cash flows and real economic activity, he argued.

hard vs soft
Source: Bloomberg, Financial Sense

When we start to look for this tangible activity, however, the positive story isn’t as clear.

The overall economic data “is going to be good, but it’s not going to be great,” Zatlin said. “And it’s going to be more toward the end of the year. It’s not going to be now.”

What Might Slow the Advance?

There are some problems for markets in the near-term. The stock market has gotten way ahead of itself, Zatlin believes.

In most of the earnings calls last quarter, Zatlin said the biggest uncertainty was on the lack of detail from President Trump’s pro-growth policy actions.

“Last quarter and this quarter, the same message has been shared by these same executives,” Zatlin said. “(They’re saying) Trump really isn’t doing anything. They like the rhetoric, but they’re not going to make investment decisions based on rhetoric. … There’s no detail.”

We still don’t know the tax implications of Trump’s plan. We don’t know how health care reform or deregulation will play out, either.  Additionally, any plans President Trump comes out with will have to make their way through Washington, Zatlin noted. This will take time for implementation.

“We’re talking about an end-of-the-year scenario at best, where companies that might benefit from a new fiscal policy will start to see it,” he said.

Priced for Perfection

If you’re in the market right now, Zatlin stated, next quarter’s earnings might be disappointing. Companies will have to deliver huge earnings growth to meet market expectations, he added.

Markets are operating on trust in the new administration. Though there are some hints of spending materializing, if we don’t see concrete growth next quarter, we can probably expect a pullback.

From there, we’ll likely see more spending, Zatlin stated. Minimum wages will go up a little bit, and the wealth effect of the stock market will push things higher. The tone is positive, he added, but we need to see real results soon.

“We’ll have about a quarter or two of this positive wave until it plays out,” he said. “We’ll get to the end of the year. However, if Trump and team haven’t delivered something substantial by the end of this year, that’s when this house of cards falls apart.”

Listen to this full interview with Andrew Zatlin on our website by clicking here. Become a subscriber and gain full access to our premium weekday interviews with leading guest experts by clicking here.

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