Is Donald Trump a narcissistic blowhard or an astute businessman with the ability to make America great again?
We will all find out over the next four years, but we should also keep in mind that he will not be running the country by himself. He has a Republican majority in Congress and most states are now run by Republicans (the party that most media were writing obits for a month ago).
Although President-elect Trump is a former Democrat and has expressed support for expanding many government programs, the advisors he has picked to date signal that the regulatory state we’ve lived under for the past eight years will be reined in. That would be good news for the economy and for the markets.
Regardless, he is not Hillary Clinton, who was poised to tack left of President Obama and bring us closer to the socialist state that U.S. Senators Bernie Sanders and Elizabeth Warren have been advocating.
While we worry about his stands on trade and immigration, President Trump will undoubtedly be stronger than President Obama, more bipartisan and more focused on economic growth. In all cases, it wouldn’t take much.
Undoing Obamanomics
President Trump is expected to roll back regulations, reform taxes and make other changes that hopefully will create stronger economic growth. However, to do so, he will also have to undo Obamanomics, which consisted of adopting a failed stimulus plan, putting the Federal Reserve Board in charge of the economy, and increasing government control and taxes.
Fed policies initially weakened the dollar, making U.S. exports relatively attractive to the rest of the world; as other countries followed the Fed’s lead and adopted loose monetary policies, the dollar has strengthened. A strong dollar, combined with the world’s highest corporate taxes and taxes on profits earned abroad have made corporate America less competitive.
Corporate profits have been low as a result and, without Fed manipulation, that likely would have meant lower stock prices. Now, with the election over and the economy allegedly improving, the Fed is poised to boosts interest rates to normal levels.
As a result, stocks will become relatively less attractive to investors, which will likely cause prices to fall in the short term. Bonds will also be affected, as bond prices typically fall when interest rates rise.
Recession Likely
During the Obama presidency, stock prices more than doubled and the market hit new highs dozens of times. But it was a Potemkin market, attractive on paper, yet built on the shakiest of foundations.
While the Obama economy performed poorly, the current recovery is among the longest in history. As President Trump and Congress begin to return the economy to normal, it will be subject to business cycles and a recession is likely. Media enabled President Obama to blame any economic woes over the past eight years on President Bush, but they will not do the same for President Trump. From day one, he will be blamed for any economic slowdown.
Similarly, assuming he is able to reform taxes, decrease regulations and increase economic growth, don’t be surprised if media credit economic resurgence to the work of President Obama. Can you name a single pro-growth economic policy President Obama supported? Can you name a single bipartisan initiative he supported?
Potential Sectors to Watch
While many on Wall Street backed Hillary Clinton, perhaps because they knew the queen of special interests would repay them for their campaign donations, its telling that the stock market responded favorably to Trump’s win.
Kiplinger noted that, “On November 9, hours after Trump clinched his stunning victory, the Dow Jones industrial average closed 1.4% higher, and Standard & Poor’s 500-stock index jumped 1.1%—a remarkable turnaround from election night, when the stock market appeared poised to tumble more than 4% as Trump’s chances of winning the White House escalated throughout the evening.”
Under President Trump, some sectors will, of course, perform better than others. Financial, pharmaceutical and energy stocks are likely to be among the winners.
The financial sector would benefit from the potential repeal or loosening of new regulations. The Dodd-Frank Act has been the financial equivalent of Obamacare, forcing financial firms to spend billions on regulatory compliance and stifling innovation. The new Department of Labor fiduciary rule, which would add another layer of regulations, is likewise likely to be repealed under a new DOL.
Pharmaceutical companies would have been a target if Hillary Clinton were elected president, as much attention was focused on overpricing of drugs. Increasing competition by reducing the regulatory burden would, of course, do more to control drug prices, but the Democratic party had demonized drug companies based on the practices of a couple of companies. Maybe President Trump will recognize that drug companies produce products that save lives and he will put someone in charge of the Food and Drug Administration who will make approval of new drugs a priority.
The pharmaceutical industry will also benefit if tax reform enables American companies to return their foreign profits to the U.S. without being double taxed at current rates.
President Obama was beholden to environmentalists, stifling the Keystone pipeline, while his Environmental Protection Agency virtually shut down the coal industry. While the Keystone pipeline overall would have a positive impact on the environment and reduce the chances of an oil spill, as oil would be transported by pipeline rather than rail, Keystone became a symbolic cause for environmentalists. President Trump will focus instead on achieving energy independence for the U.S.
Engineering companies, industrial equipment companies and others could benefit from a proposed $500 billion investment in rebuilding U.S. infrastructure. Defense contractors could likewise benefit from a potential increase in military spending.
What about losers?
Alternative energy companies may have to finally learn to rely on technological innovation instead of government welfare to survive. Hopefully, billionaires like Tom Steyer and Elon Musk will no longer be a burden to taxpayers, who have been subsidizing rich people whose contribution to the environment has been to buy electric cars and slap solar panels on their roof. The impact on the environment has been negligible. Production of electricity, after all, causes far more pollution than auto emissions.
Cheaper fossil fuels would also make it more difficult for alternative energy companies to thrive. If you’re losing sleep over climate change issues, keep in mind that greater reliance on natural gas will do more to reduce climate change than greater reliance on alternative energy sources, which have had an underwhelming impact to date.
Companies dependent on Mexican or Chinese goods could also see a negative impact, given President Trump’s hard stand on trade with the two countries. Some also believe tech companies will be affected, because they may see greater restrictions on the use of foreign workers. As cited earlier, the Republican Congress will hopefully stop the new president’s most reckless policies; it makes no sense to further restrict the use of foreign workers by tech companies, who need their skills. And tech companies, like other American businesses, should benefit from tax reform.
Who knows, with President Obama no longer in the White House, maybe we’ll even see more business startups than business failures for the first time in years.
Extrapolating from price moves, traders bet that the S&P 500 would be 12% higher under President Clinton than under President Trump, and the Volatility Index (VIX) would be 15% to 30% lower. Betting against the experts will likely be profitable yet again.