Markets & Economy

Market Insights: Capital Allocation in Current Markets

Market Insights: Capital Allocation in Current Markets
  • Download

With a diverse offering of strategies, BNY Mellon is able to meet a wide range of investment objectives for investors. In this paper, we outline the base-case scenario for Economic Policy Pivots of the Trump administration, then a link to those policy pivots to Market Themes, and finally a discussion of certain Market Risks.

Economic Outlook

President Trump’s policy agenda—with its far-reaching implications for growth, regulation, trade and geopolitics—is likely to be the overarching focus for markets in 2017. What makes this so intriguing from an investment strategy perspective is that embedded in this agenda are themes that speak to elevated risks at both ends of the risk spectrum. The right tail is dominated by increasing economic growth optimism fueled by a combination of fiscal policy and deregulation. The left tail is dominated by unprecedented levels of political and policy uncertainty that threatens to drive up the risk premium of risk assets.

So far, the right tail has largely dominated as equity markets made new highs since the inauguration. Nonetheless, the executive orders that have accompanied Trump’s first months in office have also served to remind investors of the market risks associated with the President’s pursuit of the anti-globalization elements of his overall policy agenda.

 Equity Indices

Policy Pivot One: Shift From Monetary to Fiscal Policy

The Trump agenda presents investors with three broad economic policy pivots.  The first change is that the engine of the growth stimulus has shifted from monetary policy to fiscal policy, as a pro-growth fiscal agenda sweeps over the economy.  This emphasis on lower corporate and individual tax rates, repatriation of over $2 trillion in overseas U.S. corporate profits, and infrastructure spending has already produced significant moves in consumer and business sentiment even as the hard numbers on the economy have come to light .


Policy Pivot Two: The Promise of De-Regulation

Second, the promise of de-regulation is a significant pivot from the previous administration as Congress and the President have quickly settled into repealing a significant chunk of the Obama regulatory regime across a variety of industries, including Dodd-Frank and the Department of Labor (DOL) fiduciary rule. This lessening of the regulatory burden is expected to encourage credit investment and private-sector consumption growth. Sectors such as finance, energy, automobile, infrastructure, and small business in particular should be prominent beneficiaries of this deregulatory push.


Policy Pivot Three: State-Led Industrial Policy and Bilateral Trade Deals

The third notable policy pivot is the pledge to move away from multilateral international trade regimes in favor of a greater focus on state-led industrial policy and bilateral trade deals. This shift embeds within it some of the greatest risks for the economy. What new trade regimes ultimately develop from this reversal may be less important than the heightened uncertainty and the inability to predict process or outcomes which are critical foundations of a stable economic and capital market environment.


Taken together, the economic environment of 2017 has the potential to be an inflection from the “low and slow” backdrop of previous years. The baseline expectation for 2017 is that fiscal stimulus and de-regulation will encourage investment growth and consumption with the potential to add 1%-1.5% to GDP cumulatively over the next two years. The reflationary policies of the Trump administration, coming on top of recent moves in inflation rates, are likely to send inflation expectations higher still. Global growth prospects have also improved, propelled by stronger manufacturing activity in China and a notable uptick in activity in Europe. Indeed, global economies appear to be in the midst of a synchronized cyclical upswing. However, unprecedented uncertainty associated with domestic and foreign policy choices, implementation, and outcomes is likely to be a source of volatility for all asset classes in the near future, even as risk asset markets have moved higher.

An absolute return strategy is an unconstrained investment approach and performance is measured against a goal that reflects portfolio construction focused on risk management and is designed to deliver positive returns in changing market environments. Traditional “relative return” funds are managed to and measured against broad-based benchmark indices, rather than against “absolute” measures of principal risk.

Gross Domestic Product (GDP) is the broadest quantitative measure of a nation’s total economic activity. UMichigan Consumer Sentiment: Index of consumer confidence published by the University of Michigan on consumer attitudes and expectations in order to determine changes in consumers’ willingness to buy and to predict their subsequent discretionary expenditures. This index is comprised of measures of attitudes toward personal finances, general business conditions, and market conditions or prices. NFIB Small Business Optimism: Index designed from a survey asking small business owners questions related to their expectations for the future and their plans to hire, build inventory, borrow, and expand. The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. CEO Optimism in the Economy: This index is calculated by Chief Executive Magazine. Chief Executive surveys CEOs each month to compile the CEO Confidence Index data. The index tracks the general state of the economy as it relates to businesses. The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined based of goods and averaging them. Core Consumer Price Index (Core CPI) is equal to CPI minus energy and food prices and is used to measure core inflation. The reason behind excluding energy and food prices is because the prices of these goods can be very volatile.

The Standard & Poor’s 500, often abbreviated as the S&P 500, or just “the S&P”, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. NASDAQ was created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971. The Russell 2000 index is an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. VIX: CBOE Volatility Index (VIX) reflects a market estimate of future volatility for the S&P 500 index based on a weighted average of the implied volatilities for a wide range of option strikes. Shiller’s CAPE: Cyclically Adjusted Price-Earnings ratio (CAPE) based on the S&P 500 inflation-adjusted price divided by average earnings from the previous 10 years. Global Aggregate Index: The Bloomberg Barclays Global Aggregate Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities.

Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario.

Mellon Capital Management Corporation (“Mellon Capital”) is an investment adviser registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940. Mellon Capital is a wholly-owned indirect subsidiary of BNY Mellon. Standish Mellon Asset Management Company LLC (Standish) is a wholly-owned and independently operated investment management subsidiary of The Bank of New York Mellon Corporation (BNY Mellon).

“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton

Investment Management (North America) LLC (NIMNA LLC). NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. NIMNA LLC and NIMNA Ltd are the only Newton companies to offer services in the U.S. Newton is a wholly owned subsidiary of the Bank of New York Mellon Corporation. Investment advisory services in North America are provided through four different investment advisers registered with the Securities and Exchange Commission (SEC), using the brand Insight Investment: Cutwater Asset Management Corp. (CAMC), Cutwater Investor Services Corp. (CISC), Insight North America LLC (INA) and Pareto Investment Management Limited (PIML). The North American investment advisers are associated with other global investment managers that also (individually and collectively) use the corporate brand Insight Investment and may be referred to as “Insight” or “Insight Investment”. CISC and CAMC are owned by BNY Mellon and operated by Insight. The sub-adviser for the BNY Mellon Absolute Insight Multi-Strategy Fund is PIML, an affiliate of The Dreyfus Corporation.

Views expressed are those of the advisor stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. The Dreyfus Corporation, Alcentra, Insight, Mellon Capital Management, Newton, Standish, TBCAM, Walter Scott, and MBSC Securities Corporation are subsidiaries of BNY Mellon. ©2017 MBSC Securities Corporation, Distributor, 225 Liberty Street, 19th Fl., New York, NY 10281.