The election of Donald J. Trump as the 45th President of the United States served as an inflection point and a change in market leadership. Prior to November, the consensus was Secretary Clinton would be elected and would continue the political agenda of President Obama. Instead we now have a President that will focus on fiscal policy, tax reform, regulation reform, and infrastructure spending. As a result, Shamrock’s tactical themes shifted from the defensive areas of the market (utilities, consumer staples, health care, and real estate) to more cyclical areas like energy, financials, materials, and commodities.
The market rally has been welcomed by investors, but unlike past rallies resulting from actions from The Fed (QE1, QE2, & Operation Twist), the rally is a result of increasing corporate earnings and a pick up in GDP growth. The US economy is poised to finally break out of the 2% growth rate we have been stuck in since the end of the Great Recession. Below are four data points that provide optimism for the stock market’s rally to continue.
Consumer Confidence, a measure of how optimistic or pessimistic consumers are about the economy, has returned to levels not seen since before the financial crisis.
Small-business optimism (as measured by the National Federation of Independent Business Index) experienced its largest one-month gain since 1980 in December.
CEO Confidence reached its highest level in six years based on a survey conducted by the Conference Board from mid-November to mid-December.
The 10-Year Treasury rose from 2.07% on November 9th to 2.45% on December 31st (The interest rate on the 10-Year Treasury goes up when the economy is expected to strengthen in the near future).
The stock market is a forward looking indicator and the market believes President Trump will pursue pro-growth policies that will be good for business and the economy. President Trump has indicated that he will tackle many issues within his first 100 days and if successful will lead to the economy picking up momentum.
Tax Reform – The President has proposed that the corporate tax rate be lowered from 35% to 15%. The US currently has the third highest tax rate in the world. A lower corporate tax rate would entice existing US companies to re-shore cash that is held overseas and new companies to be domiciled in the US. Reducing the number of personal tax brackets and eliminating 3.8% Obamacare excise tax will benefit the American consumer.
Deregulation – Excessive regulations are a tax on businesses. President Trump has suggested that by rolling back regulations related to the financial sector, energy sector, and health care sector it will lead to increased corporate spending. Private business expenditure provide a greater multiplier for GDP growth than does government spending.
Inflation & Wage Growth – Central bank policy, designed to hold interest rates at or near zero, has prevented wages from increasing. Interest rates have already started moving higher, fears of deflation no longer persist, and we are seeing higher wages. A consumer-led economy like the US will see an increase in growth due to increased consumer spending.
Risks to the Trump Rally
President Trump’s message of “Make America Great Again” harks back to the days of President Reagan. While many believe the market can continue to move higher like it did in the 1980s and 1990s, we are still concerned that a 3 – 7% correction could occur within the first 100 days. Below are some of our concerns.
Too Far, Too Fast – Valuations for the stock market are not cheap. Unless we see meaningful corporate earnings growth, it is becoming increasingly difficult to justify paying higher and higher prices for stocks without corporate growth.
TradeWar– President Trump has voiced his displeasure with trade agreements like NAFTA and TPP. A potential trade war with China or others like Mexico could hurt the US exports leading to decreased corporate profitability.
Unpredictability – President Trump has vowed to be an unconventional president and the stock market hates unpredictability. An ill-advised tweet could cause panic with the financial markets. While we are confident in the selections for the President Cabinet, executive decisions by Trump will have huge implications.
The Investment Committee at Shamrock continues to favor equities over fixed income. Our strategies continue to hold some dry powder (cash) that can be deployed with a market correction or if our economic indicators continue to improve. Active management can be an excellent choice for investors looking to participate in the industries and investment themes most likely to benefit from a Trump rally or raise cash if the market becomes skittish with the Trump Administration. We welcome the opportunity to have a call or meeting with you to expand on our thoughts and our outlook for the global markets. Please contact us at your convenience.
