The Trump victory came as a surprise to many. Talking heads on election night coverage routinely quoted the “after-hours stock-market futures indicating a 700-point Dow Jones nosedive”. They were quick to point out that “the market obviously doesn’t think Mr. Trump’s economic choices will be helpful”. Those same pundits have been slow to declare the market’s subsequent blistering 2000-point advance from that nadir as affirmation of the opposite. The small-cap market has advanced nearly 20% since the election. Biotechs, Healthcare stocks and steel manufacturers have seen similar advances and more. Much of this has come at the expense of the bond market, where yields advanced and prices fell at the fastest clip in over twenty years.
Regardless of how you feel about Mr. Trump personally, professionally, or politically, these moves are communicating a clear story; pragmatic capitalism will win out over social-engineering every time. Investors really do understand why a tax cut is stimulative and “helicopter money” is not. Our deficit has advanced more in the past eight years than in the past two centuries. And what do we have to show for it? We have a moribund economy with poor prospects and low interest rates because it has nearly been run into the ground. We have banks in de-risk mode in order to comply with strangling regulations. Sure, we have a few “green shoots” with unemployment continuing to improve. But those green shoots were a first-term Obama declaration that have seen many a frost and have yet to produce their first seeds five years post.
This whole languishing ordeal has been compounded by growing deficits through program expansion (increased unemployment benefits and Obamaphones etc.) rather than growing deficits through decreased taxation. Decreased taxation has a larger ripple effect giving each participant greater profit motive which leads to greater productivity and hiring. My socially-sensitive friends may need to read up on the Laffer Curve and similar lower-tax-brings-broad-benefits philosophies that have been unearthed over the centuries. This ordeal has hit savers particularly hard since low interest rates have robbed them of cash flow just as their Obamacare premiums exploded. The election wasn’t really that hard to predict and I wrote about it and tweeted about it weeks before the election. We also positioned our clients in Healthcare and biotech stocks as well. I did miss the call on the spike in interest rates however.
So yes, the market likes Mr. Trump for his tax plan and his protectionist leanings. However, the best kept secret may be the market’s disdain for regulation, whose days may be numbered. Bankers and mortgage brokers will tell you quickly that the government is up in their business like your Gastroenterologist. You may say that is a necessary evil given their propensity to misbehave like the subprime fiasco. But I will retort that subprime was the manifestation of social-engineering rules that originated with Bill Clinton and Barney Frank in 1996 when they legislated that financing for low-income buyers “was just too restrictive”. They forced Fannie Mae to lower lending standards and required them to lend to shaky buyers; aka subprime. Subprime was never the idea of the bankers; the social programs drew first blood. That being said, many bankers’ moral compasses went haywire along the way and they made the most of their new opportunity. I’m not defending that. I’m simply mindful of the unintended consequences of bureaucratic social engineering, and Wall Street’s history of payola, hyper-creativity and complicity.
The sometimes cozy relationship between the investment community and legislators can also lead to unintended consequences. While seated at a meeting in 1999 with (then-Chairman) Sanford Weill telling us about the pending merger of Citibank, Smith Barney, and Traveler’s Insurance only being illegal until the repeal of Glass-Steagall, I leaned over to my friend, Michael Brunner, and whispered “this won’t end well”. Indeed.
Bring back Glass-Steagall and repeal Dodd-Frank! I will bet Mr. Trump agrees.
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