Tags: Trump Administration | Stock | Investors | Embrace | Good | Trump | Ignore

Stock Investors Embrace Good Trump and Ignore Bad One

Stock Investors Embrace Good Trump and Ignore Bad One
(AP/John Minchillo)

By    |   Wednesday, 26 April 2017 12:30 PM

Once again, investors appear to be placing the bet that Good Donald Trump will be great for the market and that Bad Trump won’t be all that horrible.

That was on display on Tuesday. The Dow Jones Industrial Average soared more than 230 points after it was reported that the White House’s tax plan, whose broad outlines will be announced on Wednesday, will propose cutting corporate tax rates to 15 percent, a Trump campaign pledge that many thought the president was backing away from. In the past week, the broader S&P 500 has climbed just more than 2 percent, to 2,388.

But this week Trump also followed through on a campaign promise that many have suggested would be bad for the market. On Monday night, the Trump administration moved forward on imposing its first tariff, not on China or Mexico but on Canada, which just weeks ago was not seen as a target. The move may suggest that the president’s protectionist stance is wider than earlier thought. Many economists have said that those policies, which retailers and other large U.S. companies have strongly opposed, could drive up prices and the cost of basic materials and slow the U.S. economy, not to mention Mexico and the rest of the world. Investors, though, didn’t pause their cheering to notice.

Indeed, ever since the election the sentiment has been to buy on the whiff of tax cuts and not to sell on actual changes in trade policy. Some are worried that dynamic could be setting the market up for a fall. “It is curious about what is driving the markets,” said Gluskin Sheff strategist David Rosenberg. “If it is a renewal of the Trump trade, one could legitimately ask how many times can Mr. Market possibly keep rallying on the same piece of news.”

Oddly enough, the continued blind eye to Bad Trump may actually make sense. Market reactions are a calculus of not just probability but impact.

The tariffs that Trump announced on Monday evening against Canadian lumber are almost guaranteed to happen. The Obama administration was moving toward the same outcome as well. But its effect will be small. The U.S. imports about $5 billion of Canadian lumber, not all of which will be hit by the tariff. Even if it was, estimates suggest the tariff could cost American companies $500 million in higher prices, not a big hit in a nearly $19 trillion economy.

Tax reform, particularly a cut to a 15 percent corporate tax rate, is less certain. Betting market PredictIt put the chance of any corporate tax cut by the end of the 2017 at 73 percent, up from just 52 percent on April 17.

The impact of that, though, could be enormous and still undervalued. David Kotok, the CEO and chief investment officer at Cumberland Advisors, said if Trump gets the tax plan he is looking for, including the 15 percent corporate tax rate and significant cut in the levy companies would have to pay to repatriate foreign cash, that could add as much as $15 a share in earnings per share for the S&P 500, or as much as $125 billion in additional profits each year for those large U.S. publicly traded companies.

But remember the possibility of that is up only 21 percent in the past week. Apply that to the additional earnings, and you get an effective expected jump in earnings of $3.15 a share. Considering that the S&P 500 trades at 18.5 times earnings, that means the tax news should have boosted the value of the S&P 500 by nearly 60 points. The index, though, is up just 40 points from where it closed on April 17. Investors are not exuberant enough about the Trump tax cuts.

The problem is that Canadian tariffs are not just about lumber, but a proxy for where Trump stands on trade in general, which could cost U.S. consumers much more than $500 million. Many see the tax cuts as bigger as well.

But the biggest problem for investors betting on Good Trump are those shifting probabilities. If the prospects of the tax cuts go south, the market will head that way as well, most likely much faster than investors are betting on.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and the lead author on Time's economics blog The Curious Capitalist. His previous assignments included covering Wall Street in 1999, the housing market in 2005 and banks in 2008.

© Copyright 2020 Bloomberg L.P. All Rights Reserved.

1Like our page
Once again, investors appear to be placing the bet that Good Donald Trump will be great for the market and that Bad Trump won't be all that horrible.That was on display on Tuesday. The Dow Jones Industrial Average soared more than 230 points after it was reported that the...
Stock, Investors, Embrace, Good, Trump, Ignore, Bad
Wednesday, 26 April 2017 12:30 PM
Newsmax Media, Inc.

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved