Trump Agenda Could Promote Economic Growth
Money managers are hopeful that the next president will enact pro-growth policies, not protectionist measures.
The selling ended when the market’s so-called circuit breakers kicked in at midnight, halting the slide.
The big question for investors is whether Trump’s pro-growth, tax-reform, and fiscal-stimulus policies will outweigh his protectionist views, says Matthew Peron, head of global equities at Northern Trust Asset Management. “This is the debate many on Wall Street will be having,” he says. “Right now, the positive case for economic growth is strong.”
Robert C. Doll, the chief equity strategist at Nuveen Asset Management, puts it even more succinctly: “Which Trump will prevail, the one that will do tax reform or the one that stomps on [free] trade?”
Among money managers, there is hope that the realities of the presidency and pressure from Congress will cause Trump to rein in his grandstanding against trading partners like China and Mexico, which he argues get an unfair deal at the expense of U.S.-based manufacturers and their workers. During the campaign, Trump called for a 45% tariff on Chinese goods coming into the U.S. “On trade, he may end up speaking loudly but carrying a small stick,” says David Kelly, chief global strategist at J.P. Morgan Asset Management.
AS A RULE, investment professionals are wary of discussing politics. They’re schooled in fundamental analysis, and earnings models don’t easily accommodate uncertain political scenarios.
“Bottom-up stockpickers are paid not to worry about politics,” says Peron. “But as top-down strategists, you always need to take Washington policy into account. Since the global financial crisis, we are in a new world in which policy really does matter because of political intervention in the markets and a stringent regulatory regime.”
Peron says that a Trump presidency, with a Republican-controlled Congress, will usher in a “regime change” in Washington, as gridlock caused by divided government gives way to single-party rule.
Trump’s stated goals of corporate and individual tax cuts, a big infrastructure-stimulus package, and the repatriation of corporate profits from overseas could, he says, “release some animal spirits into the economy.”
On the other hand, “protectionism is the one [issue] that we worry about the most,” Peron says.
Arun Daniel, a senior fund manager at JO Hambro Capital Management Group, thinks there’s still room to run, arguing that the benefits of a Trump administration to the bottom lines of biotech and drug companies aren’t fully priced into the stocks yet. “The good news is not baked in the cake of biotech fully,” he says. “You will see the effects over time.”
Daniel is also bullish on stocks levered to fresh government-fueled infrastructure spending. Among his favorites: Jacobs Engineerin (JEC) and Martin Marietta Materials MLM in Your Value Your Change Short position MLM).
He has also identified companies that will probably be allowed to bring home at a low tax rate billions of dollars of profits currently parked overseas, which they can put to work for shareholders. They include NikeNKE in Your Value Your Change Short position (NKE), Procter & GamblePG in Your Value Your Change Short position (PG), CaterpillarCAT in Your Value Your Change Short position (CAT), and credit-card processors VisaV in Your Value Your Change Short position (V) and Mastercard (MA). For more picks and pans, see the story “Trump Triumph Creates Winners, Sinners.”
Nuveen’s Doll says that his firm hasn’t made any changes yet to its asset-allocation models as a result of the election. But he suspects that Trump’s plans to lower corporate taxes and increase infrastructure spending might lead to somewhat faster economic growth, “buttressing our existing allocation,” which overweights stocks and underweights bonds.
Joseph Amato, the equities chief investment officer at Neuberger Berman, also believes that a Trump administration will be better for stocks than bonds. “If [Trump] takes a measured approach and gets some level of concessions for U.S. workers, the trade concerns may be much ado about nothing,” Amato says.
“But that’s a big if.”
Another wild card—perhaps the biggest of all—is Trump’s shoot-from-the-hip style and somewhat unconventional views on global affairs. The president-elect, like any president, is more than the sum of his policy prescriptions. Might he unnecessarily inflame global tensions—or worse? “There is a certain personality risk with Trump,” says Kelly of J.P. Morgan. “A lot of polling shows that people’s major concern is about his temperament.”
But Kelly thinks there is reason to believe that Trump poured on the bombast simply because it was effective on the campaign trail. And he wouldn’t be the first politician to engage in saber-rattling for political effect. “He may well attempt to change his approach” for his new job, Kelly says, before quickly adding, “I’m no psychologist.”
At that point, Republicans will control all three branches of government.