It’s a tough time to be an investor right now.
The economic recovery and the bull market in stocks are each almost eight years old. Global growth is picking up, job creation is robust and stock prices are near all-time highs with volatility measures at historically low levels. However, there’s no question anxiety is running high. The election of President Donald Trump echoed the anti-establishment sentiment we witnessed manifest as Brits voted to exit the European Union in June 2016.
“A trade war would be the biggest headwind to the global economy,” JP Morgan Chase’s Anthony Chan said.
Chan made his remark while speaking on a panel at Yahoo Finance’s All Markets Summit with NatWest’s Michelle Girard and FundStrat Global’s Tom Lee.
Overall, Chan is optimistic about what lies ahead for the economy and markets. He points to strength in Europe and green shoots in Latin America. He notes that even Russia would benefit from recovering oil prices. But he acknowledges the risks.
Economists have noted that anti-trade actions like the implementation of a border tax would be quickly addressed by an adjustment in the currency markets. Nevertheless, the risk of trade wars could lead to surging prices.
“[This is] how inflation can really start to show itself,” Girard warned.
There are reasons to be optimistic
The panel, however, wasn’t all about gloom.
“It’s easy to make the case that there’s pent up demand,” Lee said, pointing to business investment and housing.
Girard acknowledged this and quickly noted that this flies in the face of the popular narrative that the economic expansion is late cycle. She noted that the US economy could find itself taking a growing share of decreasing global economic pie.
In the wake of the presidential election, investment strategists have pointed to proposed personal and business tax cuts. But Lee doesn’t think this is where opportunity lies for investors.
“I don’t think anyone’s gonna make money looking at tax opportunities,” he said. “It’s quickly discounted.”
More so than tax cuts, Lee pointed to deregulation as the under-appreciated story.
“I think deregulation is a huge opportunity,” Lee said. He noted that increased regulation has cost the financial services and energy sector $55 billion and $30 billion, respectively.
Buy CRAP
“Let’s talk CRAP,” Lee said. “CRAP is our portfolio strategy this year.”
CRAP is an acronym for computers, resources, American banks and phone carriers. These have been overlooked sectors that stand to benefit from deregulation, Lee said.
To be clear, Lee is no bull these days.
“As we move from a world where the Fed acted as a put to fiscal put, we’re talking about choppier outcomes,” he said of the stock market. “It’s possible that we have policy confusion developing.”
Lee also pointed to the flattening yield curve which has historically been a reliable bearish indicator.
And so, while there’s much to cheer in the world today, the outlook is as murky as ever.
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