Avalon produces a variety of investment commentaries.
Our perspectives and quarterly commentary are issued throughout the year and cover a range of investment-related topics.
The outlook for the US economy shifted following the election result. The market’s reaction was initially negative, but quickly reversed. Equities rose, interest rates moved higher, and the dollar strengthened as the GOP’s proposals surrounding prospects for fiscal spending and tax reform came into focus. The upshot of a fiscal package is that it boosts both the deficit and inflation expectations. While this boost will dissipate over time, the deficit will likely remain. The critical aspect of the fiscal package will be the execution of tax reform, and the method used to pay for it.
Simultaneously, the Citi Economic Surprise Index for the US improved, moving from negative to positive. The index indicates that the economy has been performing better than expected. This better data reinforced the positive sentiment suddenly engulfing the prospects for the US economy.
Economists tend to agree that infrastructure spending is less simulative than tax cuts. In a National Bureau of Economic Research* study spanning nearly 40 years of fiscal adjustments across developed economies, they find fiscal stimulus done through tax cuts and paid for by spending cuts the most effective method of stimulating economic growth. Having a two-pronged, longer-term stimulus package could effectively reinvigorate some demand and inflation for a time. The size of payments, the frequency or the permanence and length of policy shifts also plays into effectiveness of a stimulus.
The importance of intentional design and delivery comes from the theory of mental accounting. The basic thrust of the theory, as applied to stimulus packages, is that people react differently to different sized stimuli. A large sum is more likely to be considered an asset, and smaller amounts treated as income. The Federal Reserve** has found that when people considered the “lump sum” of the 2011 payroll tax cut, they intended to spend ten to eighteen percent of it. But after it was doled out paycheck by paycheck, they spent far more—twenty eight to forty three percent.
With US yields and inflation expectations rising, the US dollar has surged. While this is a headwind to US exports and dollar priced commodities, it benefits the international central banks who have been attempting to spur inflation and growth. The Japanese yen, the Euro and the Chinese RMB have all weakened substantially since the US election, providing a tailwind to their inflation pressures and export growth. Though it is not going to reverse the underlying problems in each area, a strengthening dollar provides a window of hope for monetary policies to achieve their intended goals. For China, the dollar surge provides an opportunity to continue to weaken the RMB amidst pressure to further devalue.
With inflation potentially accelerating, the Fed will now debate how far inflation should run before tightening. This provides the Fed with the potential opportunity to increase fed funds beyond where it would have otherwise. By letting inflation run higher, it allows the Fed to normalize at a faster clip down the road. Granted, the prospect of raising the inflation target from 2% seems unlikely near-term, but has been debated publicly by Fed Presidents before. Whether the Fed allows inflation to run will be critical to how Fed policy unfolds in 2017. For the time being, the Fed is poised to raise rates in December with the market pricing in 96% chance.
*Alensia, Alberto and Ardagna, Silvia “Large Changes in Fiscal Policy: Taxes versus Spending”, National Bureau of Economic Research: 2010.
**Graziani, Grant; van der Klaauw, Wilbert; and Zafar, Basit “A Boost in the Paycheck: Survey Evidence on Workers’ Response to the 2011 Payroll Tax Cuts”, Federal Reserve Bank of New York Staff Reports: 2013.
TPP Is Dead. What Now?
January 25, 2017
The Possibilities of Trump's U.S.
December 9, 2016
Reversal Rates Are the Next Big Challenge for Central Banks
November 23, 2016
The Good Ole Days Aren't Coming Back
October 13, 2016
The Federal Reserve's Anti-Volcker Inflation Revolt
August 24, 2016
Why the Fed Needs to Raise its Inflation Target
August 18, 2016
Is the Rest of the World Ditching America to Trade with China?
August 3, 2016
Has the Federal Reserve Become Congress's Golden Goose?
July 20, 2016
The Fed Must Avoid the 'Credibility Trap'
June 21, 2016
Why the Fed Needs to Make a Policy Error
May 18, 2016
The Fed Faces Its 'Anti-Volcker Moment'
May 9, 2016
The Fed's Critical Global Mandate
April 29, 2016
Why the Federal Reserve Is All Talk
April 26, 2016
Is the Global Middle Class Really Here to Stay?
April 12, 2016
Quarterly and Monthly Notes
First Quarter, 2017
Fourth Quarter, 2016
Third Quarter, 2016
Second Quarter, 2016
News | Press
Avalon Advisors Announces San Antonio Expansion
December 21, 2016
Avalon Advisors Announcement
December 16, 2016
April 11, 2016
Avalon Advisors Announcement
October 1, 2015
March 1, 2014
Fourth Quarter, 2015
Second Quarter, 2015
First Quarter, 2015
Fourth Quarter, 2014
Third Quarter, 2014
Second Quarter, 2014
The opinions expressed herein are those of Avalon Advisors, LLC investment professionals at the time the comments were made and may not be reflective of their current opinions. Nothing herein shall be construed as investment advice or a solicitation or offer to purchase or sell any securities.
2929 Allen Parkway, Suite 3000, Houston, TX 77019 | 713.238.2050
755 E Mulberry Avenue, Suite 200, San Antonio, TX 78212 | 210.244.2750
3512 Paesanos Parkway, Suite 301, San Antonio, TX 78231 | 210.694.4329
©2016 Avalon Advisors, LLC | All Rights Reserved