Much of the stock market’s sharp rally since the presidential election has been credited to … well, the presidential election. Business, consumer and investor confidence has risen in response to the more business-friendly proposed policies of the incoming administration of President-elect Donald Trump.
With the inauguration only days away, lawmakers will soon start grappling with the connection between campaign promises and policy reality. Trump has elevated tax cuts/reform, increased fiscal spending, and regulatory overhaul to the top of the priority spectrum—all considered to be pro-growth policies. However, the continued pressing of his isolationist, anti-trade, and pro-tariff promises may work against this pro-growth agenda.
“If he can keep pro-business initiatives at the top of the priority spectrum—like tax reform, regulatory reform and maybe a public-private partnership in infrastructure spending—and they’re not offset by the protectionist measures, I think the markets may be in pretty good shape for 2017,” says Liz Ann Sonders, chief investment strategist for Charles Schwab & Co.
Below, we look at a few of the initiatives that may affect markets in 2017.
History has shown that when it comes to tax reform, the actual laws that end up on the president’s desk can differ vastly from what was promised on the campaign trail. The other rub is the cost: According to the Tax Policy Center, Trump’s tax plan would add about $6 trillion to federal debt over the next 10 years, and more than $20 trillion over the next 20 years.¹ Even with rosy growth assumptions applied, the math around deficits/debt is fairly ugly.
Much of U.S. infrastructure is either in need of repair or significantly aged. The incoming Trump administration favors having private/public partnerships foot the bill rather than the federal government.
“Given the lessons learned in 2009 about just how ‘shovel ready’ many infrastructure projects actually were, these plans are likely to take some time to put together, meaning this component of fiscal stimulus could be more of a 2018 story,” Liz Ann says.
Fewer regulations means lower compliance costs for companies—certainly among financial companies, which might see a lighter burden if the Dodd-Frank regulations passed in 2010 are rolled back.
Forecast: optimism, with a dose of caution
Liz Ann is optimistic that the bull market will continue. However, she says the trajectory probably will level off from the sharp upward gains seen immediately after the election. She also expects bouts of volatility for reasons including:
- Uncertainty arising from the transition between Trump’s candidacy and Trump's presidency could unsettle markets;
- Inflation or growth could heat up enough that the Federal Reserve would have to raise short-term interest rates more aggressively than expected;
- Continued U.S. dollar strength could tighten financial conditions and hurt multinational company earnings.
“Keep an eye on investor sentiment for overt signs of excess optimism,” Liz Ann says. “Remember the power of discipline and periodic rebalancing. Enjoy the ride, but don't get greedy.”
¹ Tax Policy Center, “An Analysis of Donald Trump’s Revised Tax Plan,” 10/18/2016.