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This is the rhetoric from Donald Trump that Canadian investors need to fear the most Add to ...

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The following is an excerpt from Scott Barlow’s collection of 10 charts that will define the markets in 2017. To view the entire series, click here.

In 2017, we will see the inauguration of a new U.S. president with a volatile personality and no previous government experience. With no legislative record for reference, predictions concerning U.S. President-elect Donald Trump’s economic agenda have been all over the map, and frequently tend towards the apocalyptic.

The chart above was originally presented by Canadian ex-pat George Pearkes, now the macro strategist at Bespoke Investment Group. Measuring the relative performance of U.S. small-cap and emerging market equities, I will be using this chart in the next four years as my anti-trade ‘Fortress America’ indicator.

The chart divides the value of the iShares Russell 2000 exchange-traded fund (ETF) by the unit price of the iShares MSCI Emerging Markets ETF. The U.S. small-cap ETF is used instead of the S&P 500 ETF because small-cap stocks generate revenues almost entirely domestically and are a better measure of U.S. economic activity relative to the rest of the world.

The general trend over the past five years was steady outperformance of U.S. small caps versus emerging markets equities. This might come as a bit of surprise at first in that economic growth in China and Asia has far outpaced U.S. gross domestic product expansion. But, the emerging markets index also includes the struggling economies of Brazil, Russia and other oil producing nations hit by the decline in the price of crude.

The U.S. election’s effects are clear at the end of the chart. The sharp spike higher reflects strong inflows into U.S. equities – equity ETFs saw a record $52-billion (U.S.) of inflows for the 11 business days from the Nov. 8 election to Nov. 22, according to TrimTabs research. It also underscores the significant sell-off in Mexican assets as investors adjusted prices to account for the possibility of trade sanctions.

Mr. Trump made threatening noises towards Asian exports during the campaign, at one point proposing a 35-per-cent tax on Chinese goods entering the United States. More concrete efforts in this direction will have major effects on markets, and these will be evident on this chart.

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Follow on Twitter: @SBarlow_ROB

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