The election has created tectonic shifts in government and promises to make bold changes in the economy. We have been gathering consensus views from some leading financial analysts for 2017
- Global interest rates are going up.
- Global inflation is going up.
- Global growth is going up.
- Recession risk is going down.
A new consensus is also building. The rise of nationalistic self-interest is upsetting the old order the world over. For the past decade central bankers have been in control of economic policy throughout the world. It has resulted in low or even negative interest rates in an effort to stimulate economic growth. The result has been like pushing on a string. Growth has been slow (the string as a whole hasn’t been moving) and the middle class in the developed world has seen their wages stagnate and their jobs disappear (the middle of the string) while those at the top (the far end of the string) have been virtually unaffected. It’s part of the reason for the change in political leadership in the U.S. and the re-emergence of economic nationalism as evidenced by the Brexit vote in Britain.
As central bank leadership takes a back seat to aggressive fiscal policy, we can expect political leadership to focus on job growth and economic relief for the long-neglected middle class. Domestically, here is what we expect to see:
Tax reform: Trump’s campaign promised corporate tax reform. To make American companies more competitive globally, he has proposed reducing corporate tax rates from 35% to 15%. A special 10% rate is designed to repatriate corporate profits held offshore.
Individuals will be taxed at three rates depending on income: 12%, 25% and 33%.
Fiscal policy: The Trump administration wants to spend new money on infrastructure: transportation, clean water, the electric grid, telecommunications, security, and energy.
Health care: Trump wants to repeal and replace Obamacare.
Trade: The new administration has vowed to withdraw from TPP (Trans Pacific Partnership) and renegotiate NAFTA (North American Free Trade Agreement). They also intend to challenge China regarding currency manipulation and unfair trade practices.
Immigration: President-elect Trump intends to establish new, tougher immigration controls to boost wages, build a wall along the U.S./Mexico border, deport criminal aliens and end sanctuary cities.
Economy: 25 million new jobs over the next decade is the goal of the incoming administration. They aim to boost economic growth from 1.5% to 3.5% or 4.0% annually.
The Trump administration will focus on job creation, economic growth, infrastructure spending, reduced regulation, and energy independence while reducing governmental efforts to prevent climate change. The people that Donald Trump has chosen for his cabinet are largely from the private sector; people that have backgrounds in running successful businesses and creating jobs.
These things are the primary reason that the stock market has reacted well to the election of Donald Trump. Corporate earnings have been essentially flat for the past three years. Professional investors see opportunities for renewed economic growth, which will increase corporate profits. While we view this development with optimism, we always remain cautious. We expect increased market volatility, especially if terrorist attacks continue throughout the globe. We also expect interest rates to rise as the Federal Reserve brings rates to a more historically normal level.
We also see opportunities for the creation of new companies. The number of publicly traded companies has dropped by nearly 50% since 2000. At the same time, the number of companies that are held by private equity firms has grown explosively – by a factor of six! This provides a great opportunity for privately held companies to go public and provide yet another opportunity for greater market growth.
As always, we remain cautious in keeping with our philosophy of preserving our clients’ capital. Over the long term, we see the potential for a new American renaissance.