Is a Trump Presidency good for the economy?
Written by Rick Welch on December 5, 2016
May be we should not have been so surprised. Stock price performance in the summer leading up to a presidential election can offer good insight into which candidate will be successful in November. When the market falls from August through October the replacement party has a great track record winning 86% of the time. From August 1st through October 31st we saw the S&P 500 fall 2.18% and, in keeping with the past predictive trend, on November 8th the nominee of the replacement party, Republican Donald Trump, was elected our 45th President. With the initial surprise of the election behind us, we now can focus on how a Trump presidency could impact the domestic economy, the financial markets and our investment portfolios.
As the cloud of election uncertainty clears, most analysts expect that a Trump presidency will be built on his campaign themes of pro-growth, pro-business and America-first. President-elect Trump desires more prudent monetary policy and will look to encourage economic growth with fiscal rather than monetary stimulus. During his campaign, Mr. Trump promised “to build the next generation of roads, bridges, railways, tunnels, seaports and airports.” An infrastructure spending plan of this magnitude could cost $500 billion and add 0.5% to GDP. While shovel ready projects may take some time to make ready, government spending on infrastructure can act as a broad economic stimulus creating new jobs and encouraging corporate investment. This we see largely as a positive for the economy.
Another form of economic stimulus could come from promised tax cuts and an overhaul of the federal tax code. The Trump tax plan features just three individual rate brackets (down from the current seven), reduces the top personal income tax rate from 40% to 33%, repeals the AMT, estate tax and Medicare Investment Income tax, and provides an increased emphasis on child care tax breaks. In addition to the personal income tax cuts, the Trump proposal would also reduce the corporate tax rate from 35% to 15%. Also additive to economic growth is the Trump proposal to allow businesses to choose between a net interest deduction or the expensing of equipment purchases, the latter which encourages new capital investment in plant, property and equipment. It is estimated that the Trump tax plan could add 1.2% to GDP.
Deregulation advocates hope that President Trump will push to roll back a broad list of costly regulatory measures in banking (in particular, the dismantling of the Dodd-Frank Wall Street Reform and Consumer Protection Act), environmental protection and labor. Some of the biggest beneficiaries of deregulation are likely to be banks, drug companies and oil and gas pipelines. In the two weeks immediately following the election we saw large share price gains in banking (+17%), biotechnology (+9%) and industrials (+6%). The surging share prices in the financial and industrials sectors suggests that an early stage sector rotation (from high growth to low growth) may be underway.
What should investors expect in the Trump presidency? Too early to tell. If a return to Reaganomics is what we seek, then a pro-growth and pro-business focus coupled with large infrastructure spending, tax cuts and a more business friendly regulatory environment could all go a long way. Having a Republican Congress will make some of the work of the new administration appear to move more quickly and smoothly than in recent years. Possible obstacles await including a well-defined path of the Fed to normalize interest rates and Mr. Trumps’ populist stands on immigration and free trade. Will we make America great again? We lean towards YES.
