The death of repeal and replace, the Trump agenda, and stocks
There was no shortage of angst in the investment community 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 quickly 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, proposing policy changes while still on the sidelines is one thing. Enacting those changes is another.
Much like a UFC fighting match, 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
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.
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 profit growth.
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
| MTD % | YTD % | 3-year* % | |
| Dow Jones Industrial Average | -0.7 | +4.6 | +7.9 |
| NASDAQ Composite | +1.5 | +9.8 | +12.1 |
| S&P 500 Index | 0.0 | +5.5 | +8.1 |
| Russell 2000 Index | 0.0 | +2.1 | +5.7 |
| MSCI World ex-USA** | +2.1 | +6.1 | -2.3 |
| MSCI Emerging Markets** | +2.4 | +11.1 | -1.2 |
| Bloomberg Barclays US Aggregate Bond TR | -0.1 | +0.8 | +2.7 |
Source: Wall Street Journal, MSCI.com, CNBC, Morningstar
MTD returns: February 28, 2017—March 31, 2017
YTD returns: December 30, 2016—March 31, 2017
*Annualized
**in US dollars
Surging consumer confidence and the economy
Surveys of consumer and business confidence have surged since the election, including the Conference Board’s survey and the NFIB’s survey of small business sentiment.
A stirring of the “animal spirits” is seemingly a prerequisite for economic activity. Without rising optimism, consumers and businesses are less likely to spend and boost economic growth.
At the March meeting of the Federal Reserve, central bankers raised the fed funds rate by 0.25% to a range of 0.75%-1.00%, and Fed Chief Janet Yellen took a cautiously optimistic stance on the economy.
However, in response to a question at her quarterly press conference, she noted, “I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions based on expectations about the future.
“I think it’s fair to say that many of my colleagues and I note a much more optimistic frame of mind among many, many businesses in recent months. But, I’d say, most of the business people that we’ve talked to also have a wait-and-see attitude and are very hopeful that they will be able to expand investment.…I’m not seeing that at this point (increased spending), but the shift in sentiment is obvious and notable.”
In other words, the good cheer being reflected in confidence surveys, including the highest reading in almost 17 years from the Conference Board’s Consumer Confidence Index, has yet to materially translate into faster growth.
One vivid example–the widely followed GDPNow model from the Atlanta Fed suggests Q1 GDP is set to rise a scant 0.9% on an annualized basis.
That may change between the March 31 reading and the release of the GDP report at month’s end, but it’s not a ringing endorsement of economic activity.
Bottom line
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.
All investing involves risk and no strategy can guarantee success. All data are taken from sources believed to be reliable, but Royal Alliance makes no guarantee of their accuracy. All suggestions are general in nature and may or may not reflect your individual situation.