A recurring theme you’ve heard from us is that stocks take their longer-term cues from what’s happening to corporate profits and expectations of corporate profits, how the economy is expected to perform (which supports profits), and what’s happening to interest rates.
But shorter term, any number of events or issues can creep on to the horizon and create distractions. Recall when problems in Greece and Europe bubbled to the surface. That’s just one example.
Like an 800-pound gorilla, the dominant theme that affected markets last month and since the election has been the presidency of Donald Trump and the policies he aims to implement.
While the political discourse has been unusually bitter, we really believe our differences as Americans are dwarfed by what unifies us.
That said, we recognize the obvious: Donald Trump is a controversial figure who elicits a myriad of opinions from Americans.
Injecting politics into any commentary has risks. We all have different viewpoints and filters and what’s said can be innocently misinterpreted. But we feel it would be a disservice to you to avoid any mention of Trump this month.
Our goal is not to praise or criticize Trump’s policies, only to view them through the narrow prism of the market, whether favorable or unfavorable. So let’s dig in.
Following his win, expectations of corporate and individual tax reform were among several policy prescriptions that fueled gains.
Moreover, regulatory reform and higher defense spending are expected to receive a warm reception from a sympathetic Congress. While Republicans have historically turned a cold shoulder to higher domestic spending, investors are still betting on some type of increase in infrastructure outlays.
Yet, we also have an administration that has railed against globalism and has shunned large, multilateral trade deals.
Markets like the former positions; they cast a wary eye on the latter, fearing the prospect of a damaging trade war.
However, early optimism has turned to caution. Few things move quickly through the halls of Congress. Competing interests seem set to slow down corporate tax reform. And Trump, who ran as a very unconventional candidate, has yet to shed his unorthodox ways.
We recognize his style appeals to some folks, but his more controversial initiatives and unorthodox ways have created some uneasiness among investors. In addition, there are concerns his pro-growth initiatives that fueled gains late last year could get bogged down in Congress.
We suspect we’ll eventually see tax reform. It’s a key policy initiative for the new president. Still, patience will be needed.
Elsewhere, themes that have supported shares during the long-running bull market remain in place. Economic growth has yet to abate and there are few signs from leading indicators that it will stall. Plus, corporate profits are rising. And for now, the Fed maintains that any series of rate hikes are expected to occur gradually.
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