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U.S. stocks’ direction will depend on the dominance of either a ‘good’ or ‘bad’ Trump
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Loading...There are two Donald Trumps in Wall Street’s eyes.
The first President Trump will push through corporate tax reform, including the repatriation of trillions of dollars of overseas cash by U.S.-based multinationals; reduce corporate taxes and top marginal tax rates; and abolish the estate tax, which he and other Republicans call the “death” tax. He will cut regulations, especially on banks and energy companies, and will slash the federal bureaucracy.
He even will give Wall Street a special gift by delaying or eliminating the fiduciary rule, under which companies that manage retirement assets have to act in the best interests of clients, not themselves. And he talks about building $1 trillion worth of new infrastructure, perhaps paid for by tax breaks, tolls or private-public partnerships. That is the “pro-growth,” or “good,” Trump.
The second Donald Trump shuts down immigration from seven Muslim-majority countries that have histories of, or ties to, terrorism, including U.S. green-card and visa holders. He conducts raids on hundreds of allegedly illegal immigrants, many of whom have criminal records. He talks loudly about building a Great Wall on the Mexican border, and boasts he could bring the cost down even as he pledges to make Mexico foot the bill, perhaps through a 20% import tax.
He bullies U.S. CEOs to keep jobs in the U.S. as he threatens to impose a border tax on goods manufactured abroad and imported back into the U.S. (Imagine the howls of outrage if a Democratic president, like Barack Obama or Hillary Clinton, had said that!) He repeatedly promises to exit or renegotiate the North American Free Trade Agreement, and doesn’t shy away from talk of trade wars with Mexico or China. That is the “economic nationalist,” or “bad,” Trump.
From Wall Street’s perspective, it’s like the angel on one shoulder and the devil on the other. Wall Street loves globalism, free trade and open borders. The lower the taxes, the looser the regulations and the fewer the barriers, the better for companies’ earnings and share prices.
But it hates tariffs, protectionism, strict immigration laws and especially trade wars. In the past, such policies have led to growing international tensions and even, through the notorious Smoot-Hawley Act, helped cause the Great Depression. In short, they raise risk and are bad for the bottom line.
The “good” Trump has prevailed, so far, for investors. The S&P 500 index SPX, +0.17% is up 9.9% since the election. On Friday, the S&P 500, the Dow Jones Industrial Average DJIA, +0.02% and the Nasdaq Composite Index COMP, +0.41% — hit all-time highs, and the Russell 2000 Index RUT, +0.05% set a record on Wednesday. The market value of the S&P 500 exceeded $20 trillion for the first time ever.
Last week, stocks rallied when the president said: “We’re going to … lower the overall tax burden on American businesses big league … We’re going to be announcing something, I would say, over the next two or three weeks.” But on Jan. 30, they sold off after the chaotic roll-out of his travel ban.
His comments have hurt individual stocks and sectors most. On Jan. 16, shares of German auto makers fell sharply after Trump threatened them with a 35% U.S. import tariff. The stock price of Constellation Brands STZ, +1.77% a stupendous performer that sells Mexican beers Corona and Modelo, at one point was down more than 10% since the election. Health-care stocks sold off when he said the U.S. needed more competitive drug pricing. Shares of Lockheed-Martin Corp.’s LMT, +0.01% stock fell twice in December and once in January, after Trump slammed pricing of the F-35 fighter. Last week, Nordstrom Inc.’s JWN, +3.42% stock apparently broke the Trump tweet curse after it fell and then rebounded when the president criticized the upscale retailer for dropping his daughter Ivanka’s poorly selling clothing line.
Markets are a lot higher since Election Day, and some of these stocks have bounced back nicely after getting Trumped. But they speak to a risk that the president may not be able to get all the “good” stuff Wall Street wants, such as tax reform and infrastructure spending, both of which must overcome significant obstacles and well-organized interest groups and opposition in Congress, while enacting the “bad” stuff Wall Street hates.
Problem is, many Trump voters like that “bad” stuff — the Wall, immigration restrictions, even protectionism — while Wall Street’s traditional Republican agenda leaves them cold. Otherwise we might have had a President Jeb Bush or John Kasich. So, although Trump’s agenda so far has been a boon to Wall Street, don’t expect him to “moderate” his views or “come around” on the things his supporters love and Wall Street hates.
With stocks at all-time highs and the CBOE Volatility index VIX, -2.30% near multiyear lows, complacency reigns supreme. I’m still bullish for now, but a lot will depend on whether we see the best of Trumps or the worst of Trumps in the months ahead.
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