Stocks have rallied more than 20 percent to a record high since Republican Donald Trump was elected president November 8, almost a year ago, on a pro-business platform of tax cuts, less regulation and trillion-dollar spending on roads, bridges and airports.
The president has repeatedly touted the market’s surge as an undeniable sign that his policies are good for America – even though Congress has yet to enact any of Trump’s promised tax and healthcare reforms. An overhaul of crisis-era Dodd-Frank regulation on the financial services industry also is less certain.
David Rosenberg, chief strategist and economist at asset manager Gluskin Sheff & Associates Inc., said Trump is wrong to take credit for the market’s push to new highs. The S&P 500 rose 0.5 percent to close at 2,575.21 on Friday as investors cheered the possibility of coming tax cuts.
“Is this still a Trump rally? The answer is still no,” Rosenberg said in a report to investors this week. “In fact, one can argue that all asset classes are performing inversely to his presidency.”
As evidence, Rosenberg said the U.S. dollar has lost value, bond markets are range-bound and stocks that pay the highest tax rates are underperforming those who pay the least.
“The DXY dollar index is down 9 percent for the year even with the recent recovery – how does this depreciation fit into the ‘America First’ narrative?” Rosenberg said. “The poster child for deregulation, the financials, have lagged the broad market by 150 basis points year to date. That surely wasn’t supposed to happen.”
A weaker dollar makes overseas sales for U.S. companies appear stronger when they are converted back from foreign currencies, while also making U.S.-made goods less expensive in other countries.
Another anomaly is seen in small-company stocks that have underperformed equities of billion-dollar multinationals, Rosenberg said.
“What else was supposed to benefit more from an ‘American First’ protectionist policy than the small-caps which are almost entirely domestic? They have lagged the large-caps by some 500 basis points so far this year,” he said.
The inability of the Trump administration and Congress to advance any major reforms is also worrisome.
“It almost seems like a miracle that the U.S. stock markets could either be at or challenging all-time highs in the face of the relentless friction between the Trump administration and Congress,” Rosenberg said.
He said the appointments of new Federal Reserve and European Central Bank presidents, rising nationalism worldwide and the possibility that Democrats will re-take the House of Representatives in next year's midterm elections are the most significant risks to the Trump agenda and the market rally.
Meanwhile, others question whether Trump’s tax cuts will really help the U.S. economy, given that the federal government is buried under record levels of debt that will sap growth.
“Negative existing federal fiscal conditions strongly suggest that any benefit of the proposed debt-financed tax cut is likely to be very muted, if it is positive at all,” chief investment officer Van Hoisington and economist Lacy Hunt at Hoisington Investment Management Co., said in a report last week.
The federal government owes more money than a year’s worth of economic output. At the end of 2016, the debt equaled 106 percent of gross domestic product.
“Studies indicate that such high levels of U.S. debt reduce the trend rate of growth in economic activity and quite possibly at a non-linear pace,” Hoisington and Hunt said.
Tax cuts are less likely to be effective catalysts of growth than they were in the past, when the U.S. government’s debt was lower in relation to economic output. The U.S. population’s median age is also rising, as in many parts of the world, which means more financial resources will be dedicated toward retirees.
“When the 1981 Reagan and 2001 Bush tax cuts were implemented, U.S. government debt was 32 percent and 55 percent, respectively, of GDP,” they said. “The Reagan and Bush tax cuts were supposed by a sharply falling federal funds rate, much stronger monetary growth and significantly higher level of money velocity.”
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