Hope is like that colourful paper umbrella we occasionally find in our cocktails. It elicits a warm and sunny feeling but it does not change the ingredients of the drink. In investing, the comforting effects of hope tend to obfuscate the truth and lead to excessive risk-taking, typically resulting in undesirable outcomes. The recent rally in equities along with a cheerful narrative in the media suggests that the anticipated actions and policies of U.S. President-elect Donald Trump are the cure to current global economic ailments. Yet leading up to the election, his ideas were regarded as harmful to the economy. There is also much confusion about what Trump’s actions and policies will be. Facts and fundamentals do not justify the recent market moves.
What remains clear is that the cyclical and structural headwinds to global growth still exist today as they did prior to election day. Most developed nations and many developing ones, including China, are mired in record high levels of debt. Wage growth in the developed world continues to decline, mainly driven by technological advancements, constraining consumers’ spending power while keeping a lid on inflation. Aging demographics continue to limit potential growth, putting the onus on productivity enhancements to do more of the heavy lifting for the economy. More recently, the rise of populism has been about levelling the playing field by reversing key growth drivers such as free trade and immigration. Based on reality, investors should be treading carefully and moderating their expectations for corporate earnings and GDP growth.