Inside Washington: September 2017 Update

By: Greg Valliere and Kevin McCreadie • September 11, 2017 • Market Commentaries

Kevin McCreadie - Economic Summary

Political risk is elevated in the U.S. and across the globe. Despite this, stock markets and economic data have displayed remarkable resilience. Outstanding issues such as NAFTA, however, could potentially derail market growth if talks deteriorate.

Dysfunction Continues In Washington

  • Interest rate policies globally are beginning to normalize nearly a decade after the great financial crisis.
  • In any other year, this would be the most significant storyline, yet Trump’s delayed fiscal promises and in-house dysfunction are capturing most of the attention.
  • The debt ceiling deadline looms at the end of September with a government shutdown very much in play.
  • Healthcare spending, social security, etc. – these costs become large rather quickly, and need to be financed with something. The U.S. cannot continue spending their way to prosperity.
  • In a worst case scenario where a shutdown does in fact take place, these have historically been resolved in short order without a material impact on financial markets1.
  • There is a fair amount of disconnect between where the Federal Reserve believes interest rates can go (3% by the end of 2019) and what levels the markets have priced in (closer to 2%)2.
  • Either way, this is still a pretty accommodative place as compared to historical levels.
  • The question remains – how in the face of raising short rates do you normalize without disrupting interest rates too fast, while the fiscal side of the equation remains outstanding?

NAFTA: What Are We Up Against?

  • Canadian financials, both the TSX and the loonie, shook pretty hard following Trump’s initial threats of pulling out of NAFTA.
  • Most recently, markets barely budged on Trump’s bravado – this proves his bluster is having a lesser impact, and investors are seeing through his tactics, which is a good thing.
  • Ultimately though, a refreshed deal needs to be agreed upon soon.
  • A deal by the end of this year is unlikely in our view. This pushes negotiations into next year, which would then be impacted by U.S. mid-term and Mexican elections.
  • If no significant progress is made over the next scheduled meetings, a delayed agreement into 2019 is a real possibility.

Markets Are Running Hot Despite This Uncertainty

  • Economies around the world are actually showing strong growth despite geopolitical risks.
  • Canada is on pace to post the largest growth amongst G20 nations in 20172.
  • All but four major economies are in expansionary territory, per Manufacturing PMI data3.
  • Previous fear was that China will suffer a massive decline in their growth rate. This “hard landing” has yet to unfold, instead China is maintaining a growth rate of around 6%2.
  • Emerging markets have been a beneficiary of this, currently the best performing asset class year to date.

Greg Valliere - The Impact of Politics In Financial Markets

President Trump’s favorability is deteriorating by the week and market participants are beginning to see through his boisterous negotiating tactics.

Washington: Delayed Fiscal Promises

  • Following widespread expectations for stimulus immediately following the election:
  • A tax cut is not even remotely on the horizon, likely pushed to the Spring/Summer of 2018. Republicans so badly want a deal, they may agree to simply tax cuts, not tax reform.
  • After promises of US$1 billion in infrastructure spending, the Trump administration has yet to propose a bill to Congress.
  • Approval rating is now in mid-30% and trending lower5, unheard of for a first-term President. This poses an even greater challenge to passing policy.

Hurricanes: The Debt Ceiling's Saving Grace

  • Both Hurricanes Harvey and Irma appear to be among the worst in recorded history. Ironically, they could prove to be the two biggest sources of stimulus in the coming months.
  • Hurricane relief is now likely to be included on the debt ceiling bill which greatly improves the odds of Washington coming to an agreement – who would raise their hand opposing such aid?
  • It will take 100,000+ workers to help with rebuilding efforts, which should positively impact GDP and labour numbers in the months ahead.

North Korea: The Greatest Threat To Financial Markets Today

  • Hanging over financial markets is the uneasy stalemate between the U.S. and North Korea
  • Kim Jong-un’s motives are entirely unclear, leaving uncertainty into what action he may take
  • Until this is resolved, markets will remain jittery
  • On several fronts, Trump’s temperament continues to be an issue
  • Fellow GOP members have lashed out at Trump’s comments/actions, some even resigning

How AGF Can Help

Investors today are looking for more tax efficiency as we muddle through this low interest rate environment. With political instability posing a clear risk of derailing market growth at any time, we aim to see through the noise with a disciplined approach of finding investment opportunities.

Tax Efficiency

  • AGF offers a range of income-producing product options available within the Corporate Class structure, creating tax-advantaged investment opportunities.

AGF Elements Yield Portfolio / Class

  • A managed solution offering income-producing investments designed for low volatility.
  • Has exhibited impressive downside protection through a number of volatile periods in the past.

AGF Global Dividend Fund / Class

  • Employs a proprietary country allocation framework to find undervalued markets based on risk, valuation and growth/momentum characteristics. Examining political risks are very much a part of the Global Equity team’s investment process.
Cornerstone Macro Research, September 2017
2 Bloomberg, September 1, 2017
3 Ned Davis Research, as of July 31, 2017
4 Ned Davis Research, as of September 1, 2017

The commentaries contained herein are provided as a general source of information based on information available as of September 5, 2017 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the portfolio managers and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to investment alternatives and strategies and is not intended to be comprehensive investment advice applicable to the circumstances of the individual. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. For more information regarding the underlying funds, please refer to For up-to-date information, visit

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Publication date: September 11, 2017

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