THE BOTTOM LINE: The Trump trade, Tesla's big problem, and a chat with BlackRock's bond chief

This week:

  • Business Insider executive editor Sara Silverstein talks about the stock market‘s rally one year into President Donald Trump’s term. She finds that despite Trump’s constant attempts to take credit for stock gains, that his return for the first 12 months is just the fifth-best in the post-war era. She shares reporting from Business Insider’s Joe Ciolli that while some parts of the so-called “Trump trade” may have faded, companies with small and medium business exposure have consistently outperformed since last November. A Goldman index tracking that group of stocks has climbed 38% over the past year, nearly double the S&P 500, while the NFIB Small Business Optimism Index hit its highest level in 12 years just months after Trump’s election.
  • Silverstein breaks down the recent issues facing Tesla and its rollout of the Model 3. The company just had a disastrous earnings report, and confirmed that the major bottleneck in Model 3 production is a battery plant in Nevada. She says this battery issue is more troubling than a simpler assembly line problem, and points out that the head of Tesla’s director of battery engineering left to start his own company, which is interesting timing.
  • In the Fidelity Insight of the week, Silverstein speaks to Matt Goulet, a vice president of sector investment strategy. He notes that the influence of the technology sector has surged over the past decade, with it now making up roughly 25% of the market. He says that ETFs are ideal for clients looking to get technology exposure, because they’re more tax-efficient, and they offer diversified holdings at low fees. Goulet also mentions that niche areas of the tech space can be reached through the use of ETFs.

  • Silverstein sits down with Jeff Rosenberg, chief fixed-income strategist at BlackRock, who identifies tax reform as the most important market driver going forward. He says that a lot is still unknown about tax reform, since we’re so early in the process, but advises people to not get hung up on the current state of the proposal, since so much could change. Rosenberg stresses the difference between supply-side tax reform, which would grow the economy’s productive capacity, and demand-side stimulus. He highlights corporate tax cuts and investment spending as essential to supply-side reform, and says that stimulating demand alone would be a mistake, as it could catalyze the end of the current economic cycle.
  • Rosenberg talks about newly appointed Federal Reserve chair Jerome Powell, and says the response to tax reform from a monetary policy perspective is crucial. He notes that the market will focus not just on Powell, but what the tilts are for other board members.
  • Rosenberg looks at the 8 1/2-year equity bull market, and tries to forecast what could potentially derail it. He says that cycles come about through changes in the business environment, and that they end when central banks react to inflationary pressures. He also mentions that cycles can end when they overheat, and notes that stimulative tax policy that drives demand past where we need it could cause problems. Rosenberg then mentions exogenous shocks that can catch investors off-guard.
  • Silverstein asks Rosenberg about the ongoing bond rally, and he dives into the global environment for bond yields. He cites the recent European Central Bank decision to extend quantitative easing, which was interpreted as very dovish, and sent global interest rates rally.
  • Rosenberg says that he’s not particularly concerned about the unwinding of the Fed’s massive balance sheet, even though that’s been a fear expressed by many. He cites comments from the FOMC stating that balance sheet normalization is operating on autopilot. Rosenberg also mentions that before former Fed chair Janet Yellen was replaced by Powell, she laid the groundwork for the unwinding, which should alleviate some concern.
  • Rosenberg then mentions that there’s a bit of a disconnect between what the Fed says it’s going to do, and what the market is expecting. He says that concern lingers around what might happen if the market catches up, and narrows that gap too quickly. Lastly, Rosenberg mentions that conditions are shaping up to encourage a rotation back to safety assets, since they will yield more on the heels of the Fed’s planned rate hikes in 2018. He makes a specific recommendation for investment-grade floating rate instruments.

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