The Trump Trade

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.
• Trade War– 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.