Can Trump Fix the U.S.?
The S&P 500 has rallied about 10% since the election. Much of that run has been concentrated in bank stocks. And there are several reasons why.
For starters, Trump and his advisors have said they want to change Dodd-Frank regulations that were designed to prevent banks from taking on too much risk. Quite simply, banks don't make as much money under Dodd-Frank, so loosening up should lead directly to more profit for U.S. banks.
Then there's interest rates. Banks make more when interest rates rise. Bank of America says a full percentage-point hike in interest rates will mean $5 billion more in annual profit. So with the Fed forecasting three more quarter-point hikes in 2017, basic math says BofA is going to make more money. And since it was about the cheapest bank in the U.S. based on book value, the conclusion was simple: buy the stock.
Next up: GDP growth. You can't raise rates unless growth is picking up. And Team Trump says the U.S. economy can grow faster. They plan to push deregulation and lower taxes as a way to make that happen. Great. I'm sure we'd all like to see the U.S. economy do a little better.
Cutting the corporate tax rate is another biggie. The U.S. corporate tax is 56%, basically the highest in the world. Sure, there are plenty of loopholes for corporations to dodge taxes, and the effective rate is really around 28%. Still, that's high. Analysts say that cutting the corporate tax rate to 25% would boost S&P 500 earnings by about $10 a share, in the 6–7% range. Also good.
Finally, there are a few other miscellaneous measures that can be seen as positive for growth. Renegotiated trade deals, a tax holiday for repatriating offshore cash, and fiscal spending on infrastructure are all being pitched by the new administration.
So with all these pro-growth policies ready to push GDP, earnings, and stock prices higher, it makes perfect sense for investors to throw caution to the wind and buy as much stock as possible, right?
Well, not so fast. There's just one thing to remember about all these terrific ideas to boost growth: none of them have happened yet.
The First Hundred Days
The first hundred days in office is the time a new president can run wild. The incoming president has won a "mandate from the people" that should allow him to pass his most important pieces of legislation without too much resistance. (Remember, Obama used this mandate to pass Obamacare as his first major initiative. I always felt this was a mistake, as the U.S. was still grappling with the financial crisis.)
So, what will it be for Trump? This is a really important question if we operate on the assumption that he won't get everything he wants. Even in a Republican-controlled Congress, he's going to hit some resistance.
Maybe the fiscal conservatives will balk at the proposed $1 trillion infrastructure spending bill. Maybe it won't be so easy to simply renegotiate trade deals. And maybe trying to renegotiate deals will spark the trade wars that some people are worried about.
I don't know what policies Trump is prioritizing for his first 100 days. I'm pretty sure it won't be a wall on our border with Mexico. And I'm pretty sure it won't be Obamacare, either (I hear the GOP is worried that leaving a few million people without health care might hurt their approval ratings).
Speaker Paul Ryan sounds ready to push bills to lower Social Security benefits, change the retirement age, and lower Medicaid benefits. Never mind that Trump promised not to mess with these benefits — Ryan may have the political clout to push them to the top of the agenda.
Again, we don't know what the priorities will be. Yet stocks have rallied a lot. Yes, there were some very good reasons for stocks to rally, as I laid out earlier. But now, there is reason for caution...
Stocks have priced in a lot of potential good news. In other words, investors hope that all the promises of growth will come true. Any time you see stocks rallying on hope, you need to sharpen your focus a little. Sentiment can change fast. Greed can turn to fear very quickly.
Tick, Tick, Boom
The optimist in me wants to see Trump take office and then embark on a measured campaign to enact the easiest policy proposal he has: corporate tax cuts. I do not see much opposition to cutting corporate taxes. The benefits would be near immediate. And one success might lead him directly to the next.
The problem with that concerns the phrase "measured campaign." Is there anything in his history that suggests he will shift to a measured campaign? Not really. And I'll tell you right now, if Trump starts his term focused on trade deal negotiations, this stock market is going to head lower fast.
Yesterday, Trump announced a press conference for next Wednesday, January 11. This would be an ideal moment to lay out his plans for his first 100 days, give us a heads up on what his first moves will be.
I think the stock market will react strongly to this news conference. And I don't expect a whole lot of action before it.
So mark your calendar, and stay tuned.
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.