Trading Trump
Mon 21 May 2018
This week I was asked to write 180 words on whether President Trump was a ‘welcome disruptor or market menace’ and how his policies can be factored into investment decisions. Despite becoming tired of the circus surrounding the 45th President of the United States, the question poses an interesting debate.
Donald the Disruptor
Innovative disruption creates new value eventually leading to the demise of an existing market and network. Just as Netflix upended the business model of Blockbuster, Donald Trump has shaken the incumbent governing system.
People are quick to forget that Trump read economics at Wharton and has run his family organisation for over 30 years. Business is in his blood and as any decent businessman knows, good products are innovative and well-advertised. Trump’s unorthodoxy and America First brand is a good combination for a man at helm of the world’s leading economy. To consider Trump as a disruptive force we must identify what he has disrupted. His style and constant use of twitter is far from former presidents’ conduct, but Trump has actually enacted policy which will impact the economy.
A Taxing job
Attributing the 16% rally in the S&P over the last year and the lofty levels of sentiment indicators to the President is fraught with difficulties. However, the fact that nearly 80% of companies mentioned ‘Tax Law’ in their year-end earnings call suggests Trump policy is clearly having an impact[1]. The issue with the administration’s landmark legislation, which came into force in November last year, is that its impact on companies is very much situation dependent and it is difficult to quantify how much the law has increased earnings expectations[2]. The Congressional Budget office estimates that the tax changes will provide corporations with a $320bn net benefit over the next 10 years and the Joint Committee on Taxation estimated that the new tax legislation will raise 2018 GDP by 0.7% over what it would have been under the old law. In managing to pass through the first piece of major tax legislation since 1986 President Trump could be considered a disruptor[3].
As the chart below shows the data paints a positive picture, confidence indicators such as the NFIB Small Business Index and Michigan Consumer Sentiment Index are at record highs, the S&P has pushed higher and inflation appears to be picking up.
Donald the Menace
US GDP grew by 2.3% in 2017, lower than the President’s target of 3% plus, but significantly better than the 1.6% growth in 2016, Mr. Obama’s last year in office. The president’s tax policy was enacted late in 2017 so would have had a minimal impact on overall domestic economic activity. Most economic theory supports a considerable lag between policy being actioned and the effects being felt in the real economy. President Trump may not have significantly stimulated the economy so far, but his trade policy may pose a real threat to economic growth. The President could bring a trade war with its biggest trade partners, China and the EU. There has been robust rhetoric and plans for tariffs announced by the US to which China and the EU have made clear they will retaliate. The outcome of ongoing talks between Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He will be closely watched by the market in hope a trade war between the world’s two biggest economies can be averted. President’s Trump’s foreign policy, which has seen the US Embassy moved in Israel and the North Korean leader labelled ‘Rocket Man’, has the potential to be market menace.
Trading Trump
Trump’s rhetoric and policy may seem inconsistent, but policies thus far have had only positive market implications and this should continue in the absence of a foreign policy blunder or impeachment. The US system of government and the binary outcome of policy proposals make factoring Trump into decision making complex. Although enjoyable to spectate we do not think it prudent to take bets on this administration, instead allocating assets on the strength of the underlying economy. The US economy remains robust, however there are signs that the cycle is maturing so we remain neutral US equities across our model portfolios.
It is with a heavy heart that I must inform you that this will be my last article for Mazars. I would like to thank everyone who has read my articles and I hope you found them both engaging and interesting.
References:
[1] https://insight.factset.com/earnings-insight-q417-by-the-numbers-infographic
[2] https://insight.factset.com/have-sp-500-earnings-expectations-for-2018-increased-since-the-tax-law-passed
[3] https://www.ecb.europa.eu/pub/pdf/other/ebbox201801_01.en.pdf?ca756dc97aa5e15d1f3154d620cf8d0d
https://www.insightinvestment.com/globalassets/documents/recent-thinking/na-us-pension-market-a-statistical-and-qualitative-review.pdf
