On election night, my friend Jessica and I were standing in the studios of Fox News in Houston as the ready to provide “color commentary” as the Presidential election proceeded. The newsroom was highly electric with reporters rushing back and forth grabbing the latest data as it poured in.
In between interviews on what a “Trump” election could mean for the country, Jessica and I stood glued to the monitors watching the results as they were reported. While we were both very hopeful that Trump could win the election, but deep down I don’t think we actually believed it. The odds of Trump winning enough of the “swing” states to gain the sufficient number of electoral votes seemed astronomical. Yet, as each of those states began to fall in Trumps favor, a whisper began to spread through the room:
“I don’t believe it…he could actually win this thing.”
But, as each state did fall to Trump, locking in the electoral votes needed to win, stock market futures went in the same direction. Down 100, 200, 500, 700 points, as panic of a Trump victory swept through the markets. It was going to be a brutal opening on Wednesday morning.
But then, just as if someone had flipped a switch, it all changed.
The “guy,” whom if elected would crash the markets and the economy, was suddenly the “long awaited Saviour.” As the markets opened the next day, optimism surged on hopes “Trumponomics” would repair the ills which had plagued the economy for the last eight-years. The chart below shows the surge.
Well, here we are 100-days later, with the markets near all-time highs as investors continue to “hope” for the promised reforms. Yet, they remain absent as the challenge to pass reforms came from an unexpected source. It was thought the “real fight” would be between the Republican and Democratic factions of both Congress and Senate. However, it turned out the fight would be between the Republicans themselves leaving the Democrats sitting on the sidelines “eating popcorn and enjoying the show.”
At each turn the “Trump” administration has run into difficulties in taking action on campaign promises. Rising tensions with Canada and Mexico have led to a reconsideration of withdrawing from NAFTA, global pressures have led to a reconsideration of withdrawing from TPP and the Paris Climate Accord. The “Affordable Care Act,” which was to be repealed, has now shifted into a “replacement” and leaves a bulk of the ACA intact along with the very aspects that continues to inflate health care costs. Tax reform remains a distant promise, along with infrastructure spending and the boarder wall, as the debt ceiling looms and opposition pressure mounts.
At the same time, while optimism has surged, the hard economic data has continued to remain weak with the Atlanta Fed ratcheting down the first quarters GDP growth to just 0.2%.
As discussed yesterday, there is a rising belief this time is different. Yet, the optimism for continued growth in asset prices is based upon the “forward estimates of rising earnings” based on tax cuts which will directly boost earnings per share. But what happens if it doesn’t come?
First, this isn’t the 1980’s, the last time tax reform was passed, with low valuations, high inflation and interest rates and much stronger economic growth to start with. Therefore, the impact of tax cuts will likely be far less than expected. Secondly, tax reform is likely going to be the single most difficult challenge of this Administration as “partisan politics” come into play. Ultimately, tax reform could be far different, and much less robust, than currently anticipated.
So, here we are at the end of the first 100-days, with little progress being made toward the things that count the most with investors. With asset prices currently priced for perfection, the real risk is that of “disappointment.” It will likely pay to “err to the side of caution” for now as the risk is clearly tilted against reward for now.
Lance Roberts is a chief portfolio strategist and economist for Clarity Financial.
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