Investment Management

Special Commentary: We Didn’t See That One Coming…

WE DIDN’T SEE THAT ONE COMIN’

It was a complete “sweep” – the Presidency, the Senate and the House of Representatives.  The Republicans won it all as well as more Governorships.  Who would have thought that the Democrats would successfully “snatch defeat” from the “jaws of victory”?  Certainly we were not so bold!  So with our clouded crystal ball let us try to divine what this political “thunderclap” might mean for the American economy and certain markets.

As enunciated so far, President-elect Trump’s economic policies are quite stimulative.  He has said that the infrastructure in the US is in bad need of repair and on that score he and the Democrats agree.  For far too long, government spending has been held in check to restabilize government balance sheets and this phenomenon has been a “drag” on overall economic growth.  Spending on projects, which might admittedly increase deficits, will increase corporate profits.  Companies which might benefit are industrials, transports and perhaps even energy.  Mr. Trump is also promising to reduce taxes on corporations and individuals.  To that end, we might well see some sort of tax overhaul and a special “tax holiday” for companies with accumulated overseas profits (think Microsoft, Apple, Intel) to entice their managements to bring the cash to America.  A tax on those profits (perhaps 10%) could be used to pay for part of the infrastructure repair and thereby may not increase the deficit as an offset. Lower taxes will benefit those who own financial assets and corporations.

Less regulation is also a promise by the Republican.  “Obamacare” is to be repealed and Dodd-Frank is to be edited heavily – just for starters.  Less regulation should help pharmaceutical companies and the finance industry, which have felt “under the gun” during the last eight years.  Energy firms would also welcome fewer rules which have inhibited their recovery.

Trade has been a hot topic of discussion in political circles throughout the campaign.  Mr. Trump has voiced many concerns about US trade policies and deals which have been struck.  There are quite a few in the country who believe that by “rejiggering” trade deals, Mr. Trump will be able to bring back lost jobs.  It will not happen.  What will happen is that prices for goods once made offshore and now made in America will go up – inflation will take hold.  By sending manufacturing offshore, the US lost jobs but got lower prices for goods.  Reversing that flow – getting some jobs back will likely mean higher prices for goods.  There is no “free lunch”.  We do not think anyone wants to start a trade war, which will do no one any good.  But there could well be more contentious relations with China, Mexico and Canada – which might mean more inflation and higher interest rates.  This would not be good for bonds.

We think fiscal stimulus will lead to higher profits, more inflation, higher interest rates and greater economic growth.  Lower company and individual taxes should spur investment and this should enhance productivity, which has been lagging for quite some time.  Greater productivity and higher employment should lead to more consumer spending which should further bolster the “animal spirits” of corporate chieftains to make further investments in capital expenditures.  President-elect Trump will be more market friendly than not and his compadres in other branches of government will be there “to lend a helping hand”

 A FINAL THOUGHT

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The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC.  These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.