Caution: This is political reflection, not financial advice. Those seeking the latter should consult Charles Schwab, Edward Jones, or your local bartender.
The American stock market is up 10% since Donald Trump was elected. This despite the broad effort by the NeverTrumpers and the #Resisters to nullify the election: meaningless recounts; attempts to subvert the Electoral College; boycotts of the inauguration; screeds by Elizabeth Warren, Nancy Pelosi, and Chuck Schumer; Soros-orchestrated protests; slow-walking of cabinet appointments; talk on the left of impeachment and Californian secession; and media hysteria of an "administration in chaos". Markets are supposed to hate uncertainty, yet Trump seems to be getting a vote of confidence by those paid to predict the financial future. Let's parse that a bit.
An upward stock market is a heavy lift from here.
- The current bull market began in 2009, with the S&P 500 tripling in the past eight (admittedly Obama) years. Profit margins are strong. Price to earnings ratios are stretched. Only once in history has the Dow Jones average gone this long without a 20% pullback.
- After eight years of giving money away, Janet Yellen's Federal Reserve is recognizing signs of inflation stirring and is poised to move interest rates back toward a "normal" 3 to 4 % over the next several years. As bond yields increase, stocks are relatively less attractive.
Clearly, the the consensus of the market is looking for good things from the Donald's team. They could be wrong; the Republicans may not be able to reach internal consensus on big issues; they may over-reach; the financial team of Gary Cohn (National Economic Council), Steve Mnuchin (Treasury), Mick Mulvaney (Budget), and Wilbur Ross (Commerce) may not be up to the task; there may be some unforeseen "Black Swan" event. But for the moment all seems possible on the financial front:
- Regulations will be slashed. The presidential order that for every new regulation, two must be repealed sets a good tone. Whatever the "replace" decision, the blankets of healthcare regulation that came with Obamacare will be removed. Scott Pruitt will return the Environmental Protection Agency to a narrow agenda of ensuring clean water and air rather than the Obama administration's focus of killing carbon. Alexander Acosta's Labor Department will reverse the tsunami of boundary-pushing expensive regulations promulgated in recent years by Tom Perez - currently a candidate to lead the Democratic National Committee.
- Tax rates will be lowered. Paul Ryan, Steve Mnuchin, and a handful of others will provide the frame, but American companies will no longer have the highest nominal tax rates in the world, and exports will be favored over imports. Mnuchin has promised a plan by August to increase economic growth to 3% from the paltry 1 to 2% which has persisted through the Obama administration.
So, what could go wrong, with this big time disruptor in charge?
- The Congressional Republican deficit hawks will run into the president who has made a fortune skating on the edge of bankruptcy in the high end real estate industry. Twenty trillion dollars of federal debt is enough; lower headline tax rates are OK if the code is simplified by eliminating deductions; defense increases need to be paid for by cuts elsewhere; repeal of Obamacare must not result in broad free healthcare. VERSUS more ships, planes, and nuclear weapons; "dynamic scoring" in which lower tax rates are thought to result in greater revenue due to an increase in economic activity; and expansion of Medicaid to those who will lose subsidized healthcare coverage. An irresistible force could meet an immovable object.
- The desirable objective of balancing foreign trade may slow global growth and draw retribution. We will need to brush off our history books to understand how the Smoot-Hawley tarriff bill contributed to the Great Depression. Or at least that is what the global corporation wing of the Republican party fears.
- We may find that having a pool of 11 million illegal immigrants living in the shadows and depressing wages for all low-skilled workers has been good for the economy - or at least for those owning the means of production. With the portion of revenue going to labor increased, that left for capital (and stockholders) will decrease. The Democrats rail against "income inequality"; Trump's immigration and foreign trade policies may actually do something about it.
At this point we really don't know. We have many encouraging cabinet appointments; aside from the immigration kerfuffle there has been a good start with executive orders; and there is a "Congressional Relations" reason that Reince Priebus is Chief of Staff; however, the difficult legislative work lies ahead. Nevertheless, there is a stark contrast between the Chicken Little behavior on the still shell-shocked Left and the sunny optimism of the denizens of Wall Street who are voting for Trump.
This week's video is a brief update on the war against ISIS in Iraq where American troops are increasingly embedded with Iraqi forces as they begin their campaign to complete the liberation of Mosul, the last major ISIS center in Iraq.
bill bowen - 2/24/17