The New Year is traditionally a time for self-reflection and New Year resolutions: You’re going go on more walks, lose some weight, cook more, and really buckle down on work – at least until March. It’s not all that different in the financial world. For the months on either side of January 1st, everyone from Barron’s to CNBC is releasing lists of stocks to own or avoid in the New Year. There’s a push to analyze your portfolio and make your predictions for the next twelve months. Honestly, I normally don’t put too much emphasis on the New Year – you shouldn’t be putting together a portfolio once a year and then tucking it away under the bed to collect dust the rest of the time. To invest means to be constantly evaluating and reevaluating your stocks. I don’t mean day-trading, mind, but researching and keeping up with your investments. So, usually, I don’t spend any more time making my guesses for the New Year than any other time – but this year is a big exception.
The Trump Administration was sworn in on January 20th, and I’ve said it before, I’ll say it again, and I think I say it here too: no matter where you stand on the political spectrum, it’s time to start analyzing the possible results of Trump’s campaign promises. There have been a lot of doomsday predictions, so I’ll add quickly that I don’t believe that another Great Recession is coming, but I do see potential storm clouds on the horizon. There are three key things that I believe we should keep an eye on, and that we have not seen before this administration – a stimulus package without any sign of a recession, a heavy focus on repealing regulations (Trump has pledged to repeal two for every new regulation created), and the potential for a trade war as the new president favors Russia over China and Mexico, despite the latter two having a much larger impact on the US economy.
Taken together, for 2017 it seems to be a positive initially for business, the economy. However, for the longer-term it’s a mixed bag, really, so let’s break it down and start from the beginning.
Trump has promised a $1 trillion dollar stimulus package, with emphasis on rebuilding American infrastructure. Generally speaking, we don’t see stimulus packages without some real threat of a recession, which is definitely not present as we enter the second month of 2017. In fact, since 2009, a very strong economy has emerged – not just in the US, but worldwide. During the election, there was a great deal of fear-mongering, and we heard only about how terrible the economy was and would become, but the numbers refute this. Company profits are at a new high, and cash is at record levels. We’re also seeing that consumer debt levels are at a 40-50 year low, and wages are growing at about 3% each year. This, coupled with the low oil prices of 2016, acted like a stimulus to the economy all on its own! Even housing, after six years, is starting to take off again (because, we have to remember, that it takes time for builders to jump through the regulatory hoops, find funding, and begin the processes). I believe, based on historical trends and mathematical analysis, that this will be a great short-term stimulus, but have negative implications for the long-term. I’ve talked before about why I believe that there is inflation on the horizon, and I think that this stimulus could represent the first steps toward long-term inflation. The high inflation of the 1960s-70s was slow to build, and so you have to be looking for the signs early if you want to spot it.
Repealing regulations was another pledge made during Trump’s campaign; he ran on the platform that they block small businesses from being able to compete, and large businesses are chased overseas, taking profits with them. When he arrived in office, Trump began filling his cabinet with leaders outspoken in their opposition to a number of regulations. Trump himself comes from a builder’s background, where regulations rule the day and changes in them can destroy years of work and preparation. Because I work in the financial industry, I’ve been absolutely swamped in news about the Fiduciary Rule for the last year (the focus of which is to ensure that a financial advisor working on a 401(k) or in any of the retirement spheres would have to fulfil a fiduciary obligation to “put the client first.” Insurance firms and big banks, who stood to lose up to $17 billion a year with implementation of the new regulations vehemently oppose the Rule). Many Trump supporters hoped that he would repeal the Fiduciary Rule when he came into the presidency, and on February 3rd he and his administration made their first public statement that they will be working against the Rule. Because of the way the Rule was developed, he cannot simply remove it with an executive order; he would have to go through the proper channels. This means he would either must have Congress repeal it, tell judicial not to enforce the Rule, or defund the program. These are not simple steps forward for the new president, and many other regulations are similarly protected. Like the stimulus, I believe that removing these regulations will be beneficial to the economy in the short-term, but questionable in the long-term.
Finally, in my opinion the biggest potential negative impact would be a trade war with China, Mexico, or both that would have long-reaching negative effects for the US economy. Additionally, he has created friction with many of the US’s traditional partners like Japan, Germany, and Australia. He has been also been favoring Russia, who does only about 1/3 of the trade that China does with the US. This imbalance in foreign affairs means that there may truly be a trade war brewing, and increased tension with Mexico, as of this writing, only increases the likelihood. I’ve also heard it said by various pundits and commentators that we should just get the trade war “over with.” In my experience, that just isn’t going to happen. These are long, drawn-out disagreements that don’t end quickly or cleanly. There is no “getting it over with” when it comes to a trade war, especially with two of our largest trade partners.
I am tentatively optimistic for 2017, but my outlook on the following years is, for now, undetermined. Presidents can achieve some good during their terms but can also do a lot of bad. I hope the moves by the new administration are mostly positive but it is something I will be tracking very closely.