In our first written update of the Trump presidency, in January 2017, we sounded a theme about the interaction of President Trump’s policies and the markets that we continue to espouse through our presentations today.
We noted that, from the beginning of the Trump presidency, the markets craved a significant tax cut, particularly on businesses. As long as that tax cut appeared to be on track, the markets would react favorably. We predicted, correctly, that the Republicans would achieve their goal of significantly cutting tax rates, leading to a continuation of favorable market conditions.
But we also noted that other later developments, if they were to occur, could undercut market performance:
- First, we expressed concern that adding the economic stimulus of a major tax cut to an economy close to full employment could lead to a perceived risk of inflation (a point I reiterated in an appearance on CNBC in March 2017). Concern about inflation, in turn, could lead the Fed to raise interest rates faster than it would otherwise, raising the specter of an economic slowdown.
In February, we saw this very concern bring volatility back to the markets. A jobs report indicated that wages were rising, a seemingly favorable development that appeared to support Trump’s prescription for economic growth as the antidote to stagnant wages. But rising wages, perhaps resulting in rising consumer disposable income, raised the specter of higher prices (inflation), leading to a market sell-off. Since then, the market has wrestled with whether inflation is a real near-term risk (most market watchers think it is not), leading to increased volatility. - Second, we expressed concern that Trump’s protectionist tendencies might lead him to carry through on threats to impose tariffs on goods entering the U.S. We noted that markets do not like protectionist policies, which can lead to trade wars and higher consumer prices. Trump’s decision last week to impose tariffs on steel and aluminum imports – leading to another market sell-off – confirmed that fear as well.
This year, we’ve added two additional near-term items that, if they occur, could roil the markets: the issuance of Special Counsel Mueller’s report on his investigation into Russian collusion, and the prospect of the Democrats winning a Congressional majority in the midterm elections. Excepting Trump’s decision to impose tariffs, the markets have been happy with his administration’s policies; they do not want to see his initiatives impeded or interrupted. The markets may be concerned if Mueller’s report asserts credible evidence that the Trump campaign colluded with Russia to impact the 2016 election, or that Trump impeded Mueller’s investigation. Recall last year when a false report that Mueller had reached such a conclusion prompted a short-lived 350 point drop in the Dow.
Similarly, the markets may be concerned if it appears that the Democrats will take control of one or both houses of Congress in the midterm elections. Split government almost certainly will thwart the implementation of administration initiatives. Further, a Democratic-led House is more likely to follow up on a critical Mueller report than one controlled by Republicans, further constricting the administration.
At this point, competing cross-currents make this election a particularly difficult one to predict; we will be providing our insights as the date draws closer. In the meantime, expect the markets to remain volatile for the reasons we have been citing.
Andrew H. Friedman is the founder and principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.
The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.
Copyright Andrew H. Friedman 2018. Reprinted by permission. All rights reserved.
