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Welcome back. US stocks poised to open lower this morning. Markets of course have posted huge gains since election night. Can the so-called Trump rally last? And what about the global economy? Will we see three and a half to 4% growth in the US? Want to bring in Muhammad El Arian right now. He is chief economic adviser at Aliance.
Muhammad, it's great to see you. Thanks so much for joining us. Thank you, Maria. Muhammad, characterize where we are right now. We're trying to figure out what the big risks are to the Trump rally certainly and to the global economy uh and its growth. How do you see things Maria? As you know, markets are in the business of pricing not just current realities but future ones.
And they surged on the news that the election of President Trump would result in higher growth and higher inflation. Why? Because he made policy announcements on deregulation, on infrastructure spending, on corporate tax reform. Now markets want to see more details. They want to see what this is going to look like.
And because we didn't get many details in yesterday's press conference, they are markets are rather sluggish this morning. Yeah, sluggish this morning. But you know, I've got a report here. I guess it's from JP Morgan Chase as well as uh one from Black Rockck that's looking at earnings for the S&P 500 Muhammad to be up between 20 and 25% this year as a result of a 15% corporate tax rate.
Now, of course, we need details on this tax reform. Will it materialize? But if we were to see a 15% corporate tax rate, do you believe that that we could see earnings move 20% from here? I would like to see the details. I think to get that type of move, you would also need growth to pick up, which speaks to the deregulation aspect and to the infrastructure aspect, and you would need the rest of the world to also adopt more progrowth.
So that's a pretty aggressive projections and it assumes that everything will come together. What are you expecting in terms of deregulation when you look at what has happened in the last 10 years or or certainly let's let's say from well yeah 10 years since the financial crisis and how the pendulum really swung to heavy regulation if we see a roll back there what's the impact so I think if we see intelligent deregulation the impact will be higher private sector activity we will see cash not used for financial engineering but put back into the economy into productive activity is I think the key issues to remember it's like you say Maria it's a pendulum we had a big crash in 2008 the natural response is to lower the speed limit on economic activities now there's a realization that the speed limit has been set too low in certain respects so I think we're going to see some deregulation but we need to look at the details the details are going to be critical yeah I mean President-elect Trump has proposed rolling back regulations corporate tax reform repealing and replacing Obamacare.
Um, do you think we will see that in in in 2017? What's your expectations for all of this materializing, Muhammad? So, I think we will see some because there's another big change that the market is responding to. For the first time in six years, we have the prospects of the administration and Congress working together.
We can get out of this gridlock that has paralyzed economic governance. So the markets are responding to not just announcements that are progrowth in nature, but also prospects that these can become implementable policies and that's an important change. I mean, is it fair to say that we're just going to see this market back in fill until we actually get the details at this point given we've seen this sharp run up since election night then?
Yes, and that's what I would suspect. But that doesn't mean you don't do anything. What we're seeing is interesting rotation. Phase one of this rally was at the asset class level and in particular driven by financials and equities, the dollar and of course higher interest rate. Phase two that played out was an internal rotation catchup tech catching up with financial.
Phase three is going to be parts of the rest of the world. So investors need to also look at the internals of this rally and not just the overall rally. So how would you be allocating capital then right now Muhammad? I think that we've moved a long way very quickly. So overall, I would reduce some of my dollars at risk, but I would allocate them slightly differently.
I would allocate them more to the sectors that have lagged. So less financial, more in favor of our sectors that have lagged. And I would also look at the big underperformer, which is certain emerging markets. Mexico, for example, has been beaten up really badly. And I think there's selected value there as well.
Yeah. I mean, Mexico's peso tumbling to another record low as Trump is pledging to change the trade policy with Mexico. Uh, how do you get exposure to Mexico without necessarily going into Mexico? So, you can do it through ETFs. You can do it through corporate bonds denominated in dollars of certain quasi sovereigns.
I think what's important is that what we're going to end up with with regard to NAFTA is not a complete dismantling of NAFTA, but a slight revision to NAFTA and Mexico can do well in that world. The important thing is that trade packs are dynamic and they evolve over time because realities on the ground evolve and I think we will get a constructive evolution of NAFTA.
Yeah. When you look around the world, Muhammad, I mean, we're all watching Europe. Obviously, a lot of people saying, "Look, the euro was a failure and we see that now." Would you put money in Europe or, you know, are you worried about what's happening there? For example, the banks in Europe, do you expect that to impact the US?
I don't expect a huge impact in the US in a negative way, but Europe can hold us back. So, they can stop us from doing even better than we can. Why? because we integrated. I think in Europe the reality is the politics is messy. They have strong anti-establishment movements. It's not clear what what they will lead to.
Some of the banks particularly in Italy haven't been sorted out. And as you say, they haven't completed the regional economic architecture. So Europe is very much behind us in terms of getting its act together. And a big issue is going to be the divergence in economic performance and in policies between the US and Europe.
And and in terms of the US, it sounds like your instinct says hold your powder dry or be a seller going into uh inauguration until we hear more details of tax reform and regulation roll back. Is that accurate? Yeah. H have some dry powder because I think that we're going to see a lot more details in the next few weeks.
All right, we'll leave it there. Muhammad, always a pleasure. Thanks so much for joining us. Thank you, Maria. Muhammad El Arian joining us there. They're coming.
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