Covenant Weekly Market Synopsis as of March 24, 2017

March 27, 2017

One step forward, two steps back. In a week that President Donald Trump approved the controversial Keystone XL project (a 1,179-mile pipeline running from the oil sands of Alberta, Canada to Steele City, Nebraska), speaker of the House Paul Ryan’s healthcare plan to repeal and replace the Affordable Healthcare Act (“ACA”) failed. Equity markets seemed to track the ebb and flow of news about the ACA vote, but ultimately on Friday when the vote was pulled markets surprisingly rallied into the close. For the week, domestic and developed equity markets experienced modest declines of 0.7% – 1.4% (domestic stocks are now negative for the month of March), whereas emerging markets posted gains of 0.4%. The yield on the 10-year US Treasury bond declined to 2.41%, after reaching a 52-week high of 2.63% only two weeks earlier. Reflecting some of the uncertainty surrounding the Trump Administration’s ability to push through future legislation, precious metals rose on the week (Gold +1.2%, Silver +2.1%) and the VIX Index (a measure of expected S&P 500 volatility) jumped nearly 15% (though it remains at a low level of approximately 13).

While markets were relatively stable last week despite the mixed legislative news, it appears that a larger cohort of investors got cold feet over the weekend. Global equities are in the red this morning and as of this writing, with the S&P Futures are down about 1%,

For a detailed view of weekly, month-to-date and year-to-date asset class performance please click here.


Math – When you multiply two or more values that are less than 1 by each other, the product is a smaller value than either number on its own – it’s just math. For example, the probability of flipping a fair coin and getting a “head” is 0.5 (50%) per coin flip. The probability of flipping a fair coin twice and getting two heads in a row is 25% (= 0.5 x 0.5). For fun, let’s apply the same math to the stock market and its reaction to President Trump’s election. Trump ran a campaign based on deregulation, healthcare reform, and tax reform. When he won, risk assets took off in anticipation of a greatly improved business environment and business sentiment indexes made historic jumps higher. However, what is the probability that all three of these campaign promises will pass (not to mention the timing of their implementation or their effectiveness). Does each one have a 90% probability, an 80% probability, or a 50% probability? If each has a 90% probability, then the collective probability of all three passing is 72.9% (= 0.9 x 0.9 x 0.9). But at a probability of 50% each, the collective probability is only 12.5% (= 0.5 x 0.5 x 0.5). The truth likely lies somewhere in between those values (except for healthcare which may now be addressed sometime in the future), but the market reaction to Trump’s election seemingly priced in a 100% probability that all three campaign platforms would come to fruition. Investors’ assessments of these probabilities (and how closely they are tied to equity market valuations) are important at this stage of the cycle as a shortfall in one or more of these signature policies will likely result in disappointment.


Populist Playbook – The topic of a global populist movement has become increasingly prevalent in the media over the last eight months beginning with the lead-up to BREXIT and culminating with the U.S. Presidential election. Both during those events and carrying forward from today, the political doctrine of populism is likely to impact key European elections this year and U.S. Congressional elections in 2018 and beyond. As the term populism has become increasingly common in general conversation and through the media’s coverage of important elections, so have Google searches for the word as shown in the chart below. As you can see, the search term “populism” reached its zenith in January 2017, in between the election and inauguration of President Trump.



Source: Google Trends


Per Ray Dalio, founder of Bridgewater Associates (the world’s largest hedge fund with $160 billion in assets) and an outstanding thinker, “…populism’s role in shaping economic conditions will probably be more powerful than classic monetary and fiscal policies.” Dalio and Bridgewater recently released a 50+ page study on populism, which includes a “Populism Index”, that shows populism is currently at its highest levels since the 1930s. The index is constructed by evaluating the share of votes received by populist parties or candidates in national elections for developed countries, including the US, UK, Japan, Germany, France, Italy and Spain. What the chart shows is that although coverage of populism by the media is a relatively recent phenomenon, the rise in populism as a political movement is in the midst of a multi-year trend.


Source: Bridgewater Associates


As a refresher, a populist movement seeks to address a perception that the common people are being exploited by a privileged elite. It is, in essence, a rebellion against the “elites” and the system they control.

Bridgewater’s report evaluates populist leaders in 10 countries since the 1920’s in an attempt to identify common character traits and prevalent trends from their policies. What they find is that populist movements are accompanied by elections of “strong” leaders that are both confrontational and exclusive. The policies of these leaders engender a positive feedback loop of increasing disorder both within the country they govern and in international diplomacy (as this tends to increase support for the leader who is viewed as doing what is best for his people). Bridgewater found that common populist economic policies include protectionism, nationalism, increased infrastructure building, increased military spending, and greater budget deficits.


Source: Bridgewater Associates


If Dalio’s prediction comes to fruition, it will fundamentally alter the trajectory of global politics and commerce. It would lead to less cooperation between countries and the potential for an increase in the number of armed conflicts. It would also reverse, or at least slow, the global commerce trend, therein negatively impacting economic growth of emerging market countries as well as developed market countries.

While many have labeled President Trump a populist, Bridgewater points out that it is far too early to tell if he will, in fact, follow a populist leadership doctrine. However, even when excluding President Trump from the conversation, the growth of political factions such as UKIP (UK), AfD (Germany), National Front (France), Podemos (Spain), and Five Star Movement (Italy) indicates that populism is indeed on the rise and will play an increasingly important role in global economics, diplomacy and financial markets.

The complete Bridgewater report is entitled Populism: The Phenomenon

Be well,