Back in June I mused about a Trump election:
Forget for a minute that Donald Trump is the Republican nominee. Think about the policies he is likely to propose as President and how they might affect the markets. Forget the campaign rhetoric for a minute, the things he’s proposed that can’t get done because the US President isn’t a dictator and can’t just do anything he wants. Divorce the message from the messenger. His basic economic platform, stripped of the campaign trail hyperbole, is:
- Cut personal taxes
- Reform the corporate tax code and lower the rate
- Spend $1 trillion on infrastructure
- Simplify regulatory structure, stop crony capitalism
- Renegotiate trade treaties to favor the US
All else equal, if that agenda had a high likelihood of being enacted, I think the markets would react positively, pricing in higher future growth. Stocks higher, bonds lower, dollar higher.
I wrote that because at the time the economy was quite weak and my thought was that absent a big rebound in the economy, we were probably going to have to get accustomed to calling him President Trump instead of the Donald. It made sense to start pricing in some of the Trump agenda ahead of the election. Of course, the consensus view that developed in ensuing months was that pricing in a Trump agenda was unnecessary because he wan’t going to get elected. And if by some miracle he did get elected the markets would do pretty much the opposite of what I wrote above. Mark Cuban went so far as to say the stock market would crash if Trump managed to gain the Oval Office. Ahem….
And so today, after an upset that shocked everyone from the Upper East Side all the way to Berkeley, (but no one in flyover country) we are starting to contemplate the policies that may come from a Trump administration. It does seem though that, at least today, we are pricing in the positives while ignoring the negatives. And there are plenty of potential negatives. As I said in June:
And if rates do rise, with stocks already highly valued, would a higher discount rate just offset any potential better growth? How would the dollar react to the prospect of opening new trade negotiations? How do you factor in Trump’s lack of foreign policy experience? What about his habit of insulting large swaths of the planet’s population? What discount rate do we put on boorishness?
The market moves today are emotional ones based on the blank policy slate that is President-elect Trump. We don’t know what policies he will propose and Congress will enact. We can probably assume that certain things from the previous administration that require no Congressional approvals will be reversed. The Keystone pipeline decision will probably be reversed although $45 oil changes the economics on that project – by a lot. The Paris Climate Accords are going to be roundly ignored. And TPP is probably DOA as well. But those are not substantive changes to what was already expected. TPP was facing an uphill battle anyway and reversing the Keystone decision is largely symbolic.
But when it comes to everything else – tax cuts, corporate tax reform, infrastructure – there is a lot yet we don’t know. It is probably safe to assume that it won’t be hard to get a Republican Congress to cut taxes. It is safe to assume that they want to reform the corporate tax code. It is certainly safe to assume it won’t be hard to find a bunch of votes for infrastructure spending – all politicians enjoy spending our money on home district boondoggles. But the details on these policies matter and we don’t have a clue right now what those will be. What kind of tax cuts? Permanent or temporary? Infrastructure? Again, what kind of infrastructure? Who decides? Corporate tax reform? How will that be coordinated with individual tax reform? How will any of this get done without blowing out a budget that is already bleeding red ink?
What about his trade rhetoric? Is he really going to pursue a rollback of NAFTA? Will he direct his Treasury Department to label China a currency manipulator? Will he direct his Commerce Secretary to pursue trade cases via WTO? What about reform of health care reform? What about the wall and our relations with Mexico? What about our relationship with NATO? Will we maintain our current defense pacts with Japan and Korea? Will he seek tariffs on Chinese goods? How will that affect the political situation there? What will he do about Syria and other flash points in the Middle East?
The stock market action today – S&P 500 up 1.1% – might seem to be signaling a better growth outlook but a look at the bond market reveals a slightly different story. Bond yields were up today with the 10 year Treasury yield up 21 basis points, breaking above 2% for the first time since early this year. The 10 year TIP though was up less than half that and the 5 year version continues to trade with a negative yield. What that means is that most of the move in bond yields today was a reflection of rising inflation expectations not better growth prospects. But, to give credit where it’s due, real growth expectations did rise some today. We’ll see if that lasts as the details about cabinet appointments and such start to trickle out.
I don’t know what the Trump administration will do once they take office. Neither does anyone else and trading based on what we know – Trump won, Clinton lost – is nothing more than speculation. Nothing has really changed yet. US stocks are still expensive. Bonds are still trading at historically low yields if slightly higher than yesterday. The dollar is still stuck in the same range it’s been in for nearly two years. Today merely extended trends that were already in place.
That doesn’t mean that we won’t see positive growth policies from the new administration. We very well may but getting out of secular stagnation or the new normal or the lesser depression – as I’ve been thinking of it – is not going to be that easy. It isn’t just a matter of going back to the Reagan playbook of lower taxes and higher defense spending. That worked in the 1980s but I suspect it won’t work today, at least not to the same degree. It isn’t 1980 and we don’t have the same economy or really the same problems. Given our debt levels I suspect the proper policy response would be to cut spending along with taxes. And frankly, I’m not even sure the tax part is necessary; our bigger problems seem to be on the regulatory side. Tax rates can be an impediment to growth but spending is the real issue. Big deficits today – and I don’t see how you do tax cuts and big infrastructure spending without them – just mean tax hikes tomorrow. It’s the spending, stupid.
The point is that one should probably be patient here and wait for some details. We need more information to make better decisions. I haven’t even touched on monetary policy but based on Trump’s talk during the campaign, Janet Yellen probably needs to start polishing up her resume. Who would replace her and what policies would they pursue? Would monetary tightening – Trump seemed pretty adamant on the campaign trail that policy has been too loose and he had several hard money types among his economic team – merely offset any fiscal stimulus? Seems like another in a long list of darned good questions for which we have no answers at present.
We will be concentrating on the markets for clues about future growth just as we always do. What’s the yield curve telling us? What about credit spreads? Inflation expectations? Can the dollar break out or will Trump’s unpopularity outside the US pull down the exchange rate as capital goes back home? The market usually tells you what you need to know. Sometimes, like today, it has little to say but says it loudly. Other times the market speaks volumes in whispers. Don’t let your emotions about the election – positive or negative – affect your judgment about your investments. It’s time for a little more Dragnet – just the facts ma’am – and little less Glee. A little more Spock and a little less James Tiberius Kirk. And a lot less TV.
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