The status of repeal and replace, the Trump agenda, and stocks
There was no shortage of angst in the markets and in the financial media that a Donald Trump victory in last year’s election would send shares down sharply, at least in the immediate aftermath of a Trump win.
In reality, just the opposite happened, with stocks surging in the wake of his surprise victory. The pre-election-day conventional wisdom didn’t pan out.
Instead, investors quickly warmed to the idea that a Republican President and a Republican Congress would enact a pro-business agenda that would fuel economic growth, and by extension, corporate profit growth.
It was an ambitious agenda that included a steep cut in corporate taxes, individual tax cuts, and tax reform, regulatory reform, and new outlays for infrastructure and national defense.
Sure, Republicans have never been fond of boosting domestic spending, but tax cuts and regulatory relief have always been a staple in the conservative agenda. Even then, Trump could strike a deal with Democrats to boost much-needed spending on roads, bridges, and airports.
Of course, the Affordable Care Act, aka Obamacare, was dead, right? Republicans haven’t been shy about trying to repeal President Obama’s signature accomplishment ever since they obtained majorities in the House and Senate.
Well, as we have recently scene, proposing policy changes while still on the sidelines is one thing. Enacting those changes is another.
Much like a the first half of the recent ISU vs. Purdue NCAA men’s basketball game, things got ugly fast, at least from the vantage point of the Republican leadership and President Trump.
Let me briefly stop here and emphasize that I am not taking a stance on Obamacare, nor am I arguing that the House Republican plan to repeal and replace was the right prescription for what ails the current system.
Instead–and this is critical–I want to view what happened on Capitol Hill through the eyes of a non-partisan investor who is invested in a diversified portfolio, one that includes a stake in the global economy and the major sectors of the U.S. economy.
Stocks and a political brick wall
So, if Republicans can’t enact their agenda, won’t that quash the so-called Trump rally? Won’t shares take a beating? I’ve seen a fair number of headlines that suggest such a scenario, so let’s address it.
I believe the stock market reaction to the failed repeal and replace effort sheds some light as to how the market may react to the potential gridlock over tax reform.
Let me explain.
The failure of the Republican health care plan has graphically highlighted the deep divisions within the Republican party. No longer do investors expect corporate and individual tax reform to sail through Congress–a stark contrast to market sentiment late last year.
So, what if tax reform goes the way of repeal and replace? Will stocks take a beating? Unlike the mixed reaction to health care reform, investors have been salivating over the prospect of a cut in the corporate tax rates.
Interestingly enough, there was little fallout in the market from the failure of Republican health care, with most major indexes rising in the week following the decision to shelve the bill (WSJ).
While a cut in corporate taxes might be considered the “crown jewel” for the market, what investors want is respectable economic growth that produces respectable corporate earnings profit growth.
Sure, political uncertainty may create noise and temporarily dampen investor sentiment, but longer term, it’s a growing economy and expectations for higher profits that support stocks.
It’s about the economic fundamentals and the long-term investment plan we recommend, which incorporates temporary setbacks. Investing is not without risks, but risks can be managed. In today’s investment world, “right-sizing” the risk exposure within a portfolio is crucial in today’s investing climate.
Conventional wisdom said a Trump win would clobber stocks short term. Just the opposite happened.
Conventional wisdom suggested the demise of the Republican health care plan would trip up shares. So far, it hasn’t.
Conventional wisdom also suggests Republican gridlock and failure to enact business-friendly legislation will drive a stake through the heart of the Trump rally. While I can’t promise there won’t be some volatility, it’s a growing economy and rising profits that we are focused on.
Put another way, if it doesn’t materially impact the U.S. economy and the economic outlook, investors have historically turned their focus back to the fundamentals.
Currently, Thomson Reuters estimates that Q1 S&P 500 profits will rise a strong 10.2% (estimate as of March 31), the best year-over-year advance in over two years. And estimates for the remainder of the year are promising.
There will be winners and losers among the politicos on Capitol Hill. Some of you will join in those celebrations, while others will seek solace. Ultimately, investors who maintain a disciplined approach and avoid being whipsawed by shifting bullish/bearish sentiment stand the best chance of reaching their financial goals.
If there are any additional questions or concerns you may have, feel free to email or call me. That’s what I’m here for and I’d be happy to offer additional insights.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA**
MSCI Emerging Markets**
Bloomberg Barclays US Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, CNBC, Morningstar
MTD returns: February 28, 2017—March 31, 2017
YTD returns: December 30, 2016—March 31, 2017
**in US dollars
For the long-term investor, it all revolves around economic activity and earnings growth. I recognize I’ve hammered this theme home before. And I suspect I’ll bring it up in future communiques, too.
But my sincere desire is to see you reach the goals we’ve talked about in our many conversations. Getting sidetracked by the story of the month will only serve to delay the achievement of these goals.
Once again, let me emphasize that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
Phil E. Gose