The Trump bump
07 February 2017
Can the new US president resurrect the American dream? David Lewis, senior vice president at FIS Astec Analytics, sees what the short sellers are saying
Image: Shutterstock
The US is on the brink of great change. Whether you think that change is good or bad depends very much on who you are, and indeed, where you live. On the campaign trail, the then presidential candidate, Donald Trump, pronounced the American dream to be dead. The ‘American dream’ was adopted as a phrase to epitomise the prospect of personal economic advancement in the land of opportunity many years ago. It is, in fact, a literary reference attributed to James Truslow Adams in his book The Epic of America (published in 1931), but some economists measure it in the advancement of one generation compared to the last. Just a few decades ago, in the 1970s, 92 percent of 30-year olds earned more than their parents had done at the same age, adjusted for inflation. Last year, it was 50 percent. By extension, of course, that means the other 50 percent earnt the same or less than their parents did. Can this be fixed, or turned around?
Much has been trumpeted about the reestablishment of industry and manufacturing in America. Looking at the effect on the Dow Jones Industrial Average (DJIA) over the last six months, it would seem that many investors are buying into that very promise. The week beginning 20 January saw the DJIA surpass the 20,000 mark for the first time ever, having been as low as 6,000 in 2009 and only 16,400 12 months ago (see Figure 1). Having peaked at 20,100 on 26 January, further political turmoil, this time regarding the partial ban on refugee travel, the index fell back slightly, ending the month around 19,800. This still represents a rise of around 2,000 points, or 11 percent, since the start of November. For completeness, over the same period, the S&P 500 and the Russell 2000 have risen 9 percent and 17 percent respectively.
Will those great industrial manufacturing companies lying in the doldrums recover and join some of those in the DJIA? With a couple of notable exceptions, the DJIA is made up of high-value producers, such as Boeing, Pfizer, Intel and Apple. Such companies use highly-skilled, highly-paid employees and automation on a huge scale. Competitors such as Mexico and China have grown on the high volume, relatively lower-skilled, lower-cost items that are more dependent on significant supplies of low-cost workers. On that basis, it can be argued that it is unlikely that the jobs that have been offshored already will ever come back to the Rust Belt regions of the US. It is not all bad news as a proportion of the imported items brought into the US are components used in US industries, building products at lower costs for either domestic consumption, or indeed to be re-exported.
This will continue to aid high-tech organisations, which are less reliant on labour, but will it help reverse the decline of the American dream? That certainly remains to be seen. If borrowing patterns supporting short selling can be taken as an indicator, it would certainly seem that hedge funds are not prepared to bet against the rising DJIA. Figure 1 shows DJIA member share volumes borrowed over the last three months, decreasing a net 10 percent up to 30 January. The turnaround seen as the index retreated from its historic peak has not created a sudden new surge of borrowing in the expectation that the so-called ‘Trump bump’ is looking shaky.
The promised bonfire of regulations will no doubt help many industries, most notably the extractive industries such as oil and coal, but will it help the basic manufacturing industries that have been promised a renaissance? By way of example, a regular member of the FIS Astec Analytics hot stocks list is Cliffs Natural Resources, a $2 billion iron ore mining and steel producing company. Cliffs has seen its share price rise some 478 percent over the last 12 months, from a little over $1.50 to over $9 at the time of writing. While this represents a significant recovery, almost half of which occurring since last November, it must be viewed in context. In 2012, shares in Cliffs were worth more than $75. This is one example of many but it is illustrative of the relative value of old industries compared to the newer ones, dominated by organisations that need fewer but higher skilled employees.
Economies do not turn around overnight, or on the change of one policy, so there is far to go yet. However, it does appear clear that the benefits of the recovery may not be as evenly spread as some might expect. One economist’s measure of the American dream is the proportion of people born into the poorest 20 percent of society in the 1980s that have now progressed to the top 20 percent. In the US at present, this ratio is around 7.5 percent. In Canada, it is 13 percent.
Figure 1: DJIA, S&P 500, Russell 2000 and DJIA short interest, indexed to 1 November 2016
Source: FIS Astec Analytics and Thomson Reuters
Much has been trumpeted about the reestablishment of industry and manufacturing in America. Looking at the effect on the Dow Jones Industrial Average (DJIA) over the last six months, it would seem that many investors are buying into that very promise. The week beginning 20 January saw the DJIA surpass the 20,000 mark for the first time ever, having been as low as 6,000 in 2009 and only 16,400 12 months ago (see Figure 1). Having peaked at 20,100 on 26 January, further political turmoil, this time regarding the partial ban on refugee travel, the index fell back slightly, ending the month around 19,800. This still represents a rise of around 2,000 points, or 11 percent, since the start of November. For completeness, over the same period, the S&P 500 and the Russell 2000 have risen 9 percent and 17 percent respectively.
Will those great industrial manufacturing companies lying in the doldrums recover and join some of those in the DJIA? With a couple of notable exceptions, the DJIA is made up of high-value producers, such as Boeing, Pfizer, Intel and Apple. Such companies use highly-skilled, highly-paid employees and automation on a huge scale. Competitors such as Mexico and China have grown on the high volume, relatively lower-skilled, lower-cost items that are more dependent on significant supplies of low-cost workers. On that basis, it can be argued that it is unlikely that the jobs that have been offshored already will ever come back to the Rust Belt regions of the US. It is not all bad news as a proportion of the imported items brought into the US are components used in US industries, building products at lower costs for either domestic consumption, or indeed to be re-exported.
This will continue to aid high-tech organisations, which are less reliant on labour, but will it help reverse the decline of the American dream? That certainly remains to be seen. If borrowing patterns supporting short selling can be taken as an indicator, it would certainly seem that hedge funds are not prepared to bet against the rising DJIA. Figure 1 shows DJIA member share volumes borrowed over the last three months, decreasing a net 10 percent up to 30 January. The turnaround seen as the index retreated from its historic peak has not created a sudden new surge of borrowing in the expectation that the so-called ‘Trump bump’ is looking shaky.
The promised bonfire of regulations will no doubt help many industries, most notably the extractive industries such as oil and coal, but will it help the basic manufacturing industries that have been promised a renaissance? By way of example, a regular member of the FIS Astec Analytics hot stocks list is Cliffs Natural Resources, a $2 billion iron ore mining and steel producing company. Cliffs has seen its share price rise some 478 percent over the last 12 months, from a little over $1.50 to over $9 at the time of writing. While this represents a significant recovery, almost half of which occurring since last November, it must be viewed in context. In 2012, shares in Cliffs were worth more than $75. This is one example of many but it is illustrative of the relative value of old industries compared to the newer ones, dominated by organisations that need fewer but higher skilled employees.
Economies do not turn around overnight, or on the change of one policy, so there is far to go yet. However, it does appear clear that the benefits of the recovery may not be as evenly spread as some might expect. One economist’s measure of the American dream is the proportion of people born into the poorest 20 percent of society in the 1980s that have now progressed to the top 20 percent. In the US at present, this ratio is around 7.5 percent. In Canada, it is 13 percent.
Figure 1: DJIA, S&P 500, Russell 2000 and DJIA short interest, indexed to 1 November 2016
Source: FIS Astec Analytics and Thomson Reuters
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