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As President Obama leaves office, it’s time to reflect on how the economy fared during his tenure. Because of the size and complexity of the U.S. economy, I have generally believed that presidents take too much credit or blame for what occurs on their watch. In many cases, bad luck or good fortune can play a larger role in a particular president’s economic performance than actual policy.
Stock indexes staged a broad, post-election rally, as investors pushed aside their concerns about a potential global trade war and a clampdown on immigration, and instead bet that President-elect Trump’s promise of infrastructure spending would propel profits at large industrial companies and his tax cuts would boost the economy. (Irony alert #1: Congressional Republicans have argued that the financial crisis stimulus (the $787B American Recovery and Reinvestment Act) did not work and fought against subsequent infrastructure spending plans as a way to boost economic growth.) While most believe that infrastructure spending would help the economy, the total impact would be largely determined by its size. At one point during the campaign, candidate Trump promised to spend about $550 billion over five years. If there is general agreement on the positive aspects of infrastructure spending, there is little consensus on Trump’s potential tax plan, which in its current form would disproportionately favor wealthier Americans.
According to the Tax Policy Center, by 2025, 51 percent of Trump’s tax reductions would go to the top one percent of earners (those earning more than about $700,000). Yes, the plan would raise the after tax income of middle class Americans by about 1.8 percent, but the top 0.1 percent would see a tax cut of more than 14 percent of after tax income. (Irony alert #2: The Trump tax plan would likely exacerbate income inequality that already exists and could be a surprise to those Trump voters who said that they felt left out of US economic progress.)
Economists caution that there are two other problems with the Trump tax plan: (1) rich people do not tend to spend their tax cuts; rather they redirect the savings into their investment accounts—that’s good for financial markets, but not so hot for the overall economy and (2) the tax cuts would cause a spike in federal debt levels – the plan would increase the federal debt by $5.3 trillion over ten years, according to the nonpartisan Committee for a Responsible Federal Budget. (Irony alert #3: Taken together, the spending and the tax cuts could balloon the national debt to more than 100 percent of GDP within a few years. How will fiscal conservatives make peace with that potential?)
Trump’s spending and tax cuts could help stimulate the economy in the short term, though the combination of those policies could also spur inflation and prompt the Federal Reserve to raise interest rates at a faster pace than currently expected. Under normal monetary policy, a faster rate hike cycle might snuff out a recovery. But some economists are more concerned that under President Trump, there would be a change in the composition of the Federal Reserve Board. (There will be a couple of vacancies next year and Fed Chair Janet Yellen’s term ends in February 2018.) A less disciplined Fed might accept more inflation, leading to higher long-term interest rates and a weak US dollar. A glimpse of how these policies could impact the bond was seen last week: more than $1 trillion was wiped off the value of bonds around the world.
Another area that could see big changes under President Trump is regulation. In addition to easing up on environmental rules, most expect to see a watering down of the Dodd Frank Wall Street reform, which had attempted to reign in the excesses, which contributed to the financial crisis. (Irony Alert #4: A populist President, put in office by an electorate that hates banks, would make life easier for the financial services industry. Financial sector stocks increased by 11 percent last week.)
Under Trump, the Consumer Financial Protection Bureau (CFPB), which was created out of the Dodd-Frank Act, will likely get diluted. In October, a federal appeals court ruled that the CFPB was “unconstitutionally structured” and as a result, the agency should be treated like others, where the president can supervise, direct and change the director at any time. Current CFPB chief Richard Cordray is unlikely to keep his job.
And finally, the big investment firms, which fought tooth and nail NOT to put clients’ interests first, are ready to resurrect their battle to water down the consumer-friendly Department of Labor Fiduciary Rule set to go into effect in April 2017.
MARKETS:
THE WEEK AHEAD:
Mon 11/14:
Tues 11/15:
Home Depot
8:30 Retail Sales
8:30 Empire State Manufacturing
8:30 Import/Export Prices
Weds 11/16:
Cisco, Lowe’s, Target
8:30 PPI
9:15 Industrial Production
10:00 Housing Market Index
Thursday 11/17:
Wal-Mart, Staples
8:30 CPI
8:30 Housing Starts
8:30 Philly Fed Business Outlook
10:00 E-Commerce Retail Sales
Friday 11/18
10:00 Leading Indicators
Defying the polls and odds, Donald J. Trump won the Presidential Election. As the results became clear on the evening of November 8th, financial markets around the world reacted swiftly: stocks plunged (at one point during the overnight session, US futures were down 5 percent, indicating a more than 800 point wipe out for the Dow Jones Industrial Average), the Mexican peso cratered by 13 percent, the US dollar tumbled and safe havens like gold, US Treasury bonds and the Japanese yen, jumped. Then a strange thing happened: as Mr. Trump spoke in the wee hours after capturing enough Electoral College votes to win, markets started to reverse course, as investors seemed to take some comfort in his conciliatory tone. By the time they rang the opening bell on the day after the election, stocks had steadied and actually closed higher on the session. So much for predictions of stock market crashes, at least in the short term!
So what happened over the course of 18 hours? It could be that investors may have learned a lesson from the UK Brexit vote. After that unexpected outcome in June, US stocks were down 5 percent in the subsequent two trading sessions, but then slowly marched back up, as investors concluded that it would take a long time to figure the impact of Great Britain’s departure from the European Union.
While investors had been concerned about some of candidate Trump’s campaign rhetoric on trade and immigration, in the immediate aftermath of the election, it was hard to measure the impact on the US and global economy as well as what future policies could mean for corporate earnings. Still, hours after the results came in, I was inundated with reader/listener/viewer questions that went something like this: “What should I do with my retirement account?” The answer for long-term investors is clear: ABSOLUTELY NOTHING!
Unexpected events can create market volatility—both to the upside and the downside, which can lure you into feeling like you should do something. Try to resist that urge by reminding yourself that you are not investing for the next four weeks, four months or even four years--you are trying to build your nest egg beyond those time frames. And even if you were planning on retiring at the end of this year, you aren’t likely to pull all of your money from your account at once – you need it to last for decades in the future. In other words, you are not investing to retirement; rather you are investing through retirement.
That’s why you have created a diversified portfolio, based on your goals, risk tolerance and time horizon - because over the long term, this strategy works. Yes, the unknown is scary and can lead to market volatility, but you have to refrain from being reactive to short-term market conditions. It’s not easy to do, but sometimes the best action is NO ACTION.
If you were freaked out when you saw big numbers on the downside, maybe your portfolio has too much risk. If that’s the case, you may need to readjust your allocation to better align with your risk tolerance. If you do make changes, be careful NOT to jump back into those riskier holdings after markets stabilize. Conversely, if you were kicking yourself for not being fully invested as stocks swung back to the upside, you might need to hold your nose and get back in. Battling emotions is something every investor encounters-one way to help you out is to establish auto-rebalancing for your accounts, which can help take fear and anxiety out of the investment process.
Here are some (early) potential financial/regulatory outcomes that could arise from the 2016 Election:
Last week, U.S. regulators essentially pronounced the so-called Living Wills of five of the eight largest financial institutions (Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street, and Wells Fargo), dead on arrival. The other three (Goldman Sachs, Morgan Stanley and Citigroup) fared better, because their plans escaped being termed “not credible”. (While Goldman’s plan was green-lighted by the Fed, the FDIC found problems and with Morgan Stanley, it was the other way around. Citigroup won provisional approval from both regulators, but must address “shortcomings” in its plans.) Considering that not one bank got a full-blown thumbs up as to how it would wind itself down amid a bankruptcy, without taking down the system, without the assistance of taxpayers or without addressing shortcomings, they are still too big to fail. However, this does not mean that the banks are in the same precarious state that they were in 2008-2009; rather their “break the glass” emergency plans are not yet strong enough to convince both the Fed and the FDIC that they would be able to unwind themselves without destabilizing the system.
Background: Before the financial crisis regulators had not properly monitored or constrained risk-taking at the nation’s largest firms. When the crisis hit, the government “did not have the tools to break apart or wind down a failing financial firm without putting the American taxpayer and the entire financial system at risk.”
To prevent that from happening in the future, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act required that large banks (total consolidated assets of $50B or more) submit plans to both the Federal Reserve and the Federal Deposit Insurance Corporation as to how they would navigate a bankruptcy without taking down the entire financial system and with no taxpayer bailout. The goal was “If a firm fails in the future it will be Wall Street – not the taxpayers – that pays the price.”
These plans are known as “living wills”—and just like an end of life directive on which the name is based, they must contemplate what would occur under the worst circumstances. Each bank is required to describe its strategy for rapid and orderly resolution in the event of material financial distress or failure of the company.
What happens next? Although the annual filing deadline is July 1, 2017 the institutions must resubmit updated plans by this October. If any of them fail, they could face higher capital, leverage or liquidity requirements; or potentially might have to exit certain businesses entirely. Meanwhile, financial company shareholders did not seem especially worried about the living will issue: amid weak earnings releases from J.P. Morgan, Bank of America and Wells Fargo, bank stocks gained 7 percent on the week.
MARKETS:
THE WEEK AHEAD: The world’s major oil producers will meet in Doha on Sunday. Analysts expect the announcement of a deal that would freeze OPEC and Russian oil output at current high levels. However, it would not likely reduce excess supply without a pick-up in demand or supply cuts by non-OPEC producers.
Mon 4/18:
Morgan Stanley, Netflix, Pepsi, IBM
10:00 Housing Market Index
Tues 4/19:
Goldman Sachs, Intel, Johnson & Johnson, Yahoo
8:30 Housing Starts
Weds 4/20:
Abbott Labs, AMEX, Coca-Cola, Mattel, Yum! Brands
10:00 Existing Home Sales
Thursday 4/21:
Alphabet, Microsoft, Starbucks, Verizon, Visa
8:30 Philly Fed Business Outlook Survey
8:30 Chicago Fed National Activity Index
8:30 FHFA Home Price Index
Friday 4/22:
American Airlines, General Electric, Caterpillar, McDonald’s, Schlumberger
