President Donald Trump has inherited an economy that is in much better shape than his predecessor did eight years ago. Nonetheless the new president has ambitious plans for his first 100 days in office. Just how much can he achieve and what will be the likely impact on capital markets?
The "first 100 days" is a term frequently used in U.S. politics to measure the initial accomplishments of a new president. It dates back to 1933 when former president Franklin D. Roosevelt used the term to describe the first 100 days of the 73rd U.S. Congress. Roosevelt's objectives were not very different from Trump's - both men came to power with a pledge to make the U.S. great again.
Roosevelt's attempts to address the Great Depression resulted in 15 new bills being passed during his 100 days. These collectively formed the foundation of his "New Deal" and included the abandonment of the Gold Standard and the implementation of the Glass-Steagall Act, separating the banking and securities industries.
"Donald Trump's Contract with the American Voter" is a blueprint the President drew up in October listing his plans for his first 100 days. Among the measures mentioned are repealing and replacing the Affordable Care Act, withdrawing from the Trans-Pacific Partnership and cancelling many of Obama's executive orders. However, as Ronald Reagan was quick to acknowledge when taking office, it is not as easy as it was in Roosevelt's day to pass swathes of new legislation. Trump is going to have to pick his battles and use his political capital wisely.
Repealing the Affordable Care Act appears a high, if not top, priority, and one with broad support in the Republican-controlled Congress. However, repealing is the easy bit, replacing is anything but. The non-partisan Congressional Budget Office estimates that 18 million people could lose insurance when the act is shelved. There is currently no real alternative that enjoys a clear consensus of support, not even within the Republican Party. Consequently, replacing Obamacare will take effort and compromise, potentially deflecting Washington's attention from the other ambitions of the 45th President.
Another feature of the Trump agenda is a $1 trillion infrastructure commitment over the next decade. However, those expecting an immediate growth boost from infrastructure spending are likely to be disappointed. There is no existing mechanism to implement such a plan on that scale. Options include block grants to states or the establishment of an infrastructure bank, both of which require legislation.
The president has also promised tax reform. But exactly what form this will take is the subject of debate, even among Republicans. Some, including Trump himself, see an avenue via lower corporate income taxes to introduce border tax adjustment, a measure which may not be compliant with WTO rules and could spark trade tensions with China and other countries. Others are hoping for initiatives to promote the repatriation of foreign earnings of U.S. companies, or are pushing for simplification of the entire tax code. Competing visions, not to mention competing interest groups, are likely to make the passage of tax measures more difficult and drawn out that many anticipate.
Unsurprisingly, therefore, the market's initial enthusiasm for "Trumponomics" has ebbed. Hopes for fiscal stimulus and a reform-led growth impulse have not fully receded, but have been tempered by recognition of the political constraints that confront every incoming administration.
Moreover, during the first days of his presidency, Trump's rhetoric has returned to his tough pre-election stances on free trade and immigration. The president and his team have launched strong criticisms at Germany and Japan, accusing them of currency manipulation in order to gain a trade advantage. His controversial temporary ban on immigrants and refugees from seven Muslim-majority countries has created concerns, including in the business community, about the U.S.' potential to draw on world-wide talent as a source of growth.
In short, while investor confidence in the Trump administration's pro-growth philosophy remains high, doubts are beginning to emerge about its implementation. Investors are beginning to ask how potentially conflicting priorities can be resolved. Those concerns are only likely to be assuaged when specific, growth-friendly legislation in areas such as taxation, deregulation and infrastructure spending makes headway in Congress. And that typically requires presidential leadership.
Our view is that market trends that began to emerge in the second-half of 2016 are likely to persist, albeit more gradually. U.S. and global growth continue to improve. Inflation appears to have bottomed in the U.S. , Japan and much of Europe, but is only likely to rise at a gradual pace. China continues to grow steadily, even if its imbalances remain unaddressed. Recessions are giving way to better growth prospects in Russia and Brazil.
Improving economic fundamentals will continue to push global bond yields and equity valuations higher, continuing market trends of the past half year. Within fixed income allocations, duration exposure is likely to be trimmed, while value and cyclical stocks should outperform defensives and dividend plays.
Various shocks are imaginable, but the focus in 2017 is likely to be on politics. Will populism in the U.S. and the U.K. be transmitted to Europe via elections in the Netherlands, France or Germany? More importantly, will this lead to policies that unnerve consumers and business, leading to renewed economic weakness?
In 1933, Roosevelt's first 100 days defined his presidency. His aim, to paraphrase, was to use the levers of government to fight the fear of fear itself. Will the first 100 days of the Trump administration similarly lay the foundations for stronger growth by focusing on reform, lower taxes and infrastructure investment? Or, instead, will Trump's policies lead to trade and international frictions, resulting in greater economic uncertainty and less growth?
Roosevelt's first 100 days helped ensure that the Great Depression would not undermine the political fabric in the U.S. , as it did elsewhere. Today, matters look different. Global growth is resilient, but it is not shock-proof. The key question for 2017, therefore, is whether populist politics will derail the global expansion.
Or, to put it another way, will politics trump economics?
Larry Hatheway is Chief Economist and Head of GAM Investment Solutions.
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