Trump’s first 100 days: the markets remain enthralled

US equity markets continue to hit record highs and the policies of US President Donald Trump are being cited as a major factor behind the continued rally. We look at the policies the fuelling the surge that’s being dubbed the ‘Trump rally’. 

Price chart on digital screen
Source: Bloomberg

Since Donald Trump became US president, the Dow Jones Industrial Average, Nasdaq and S&P 500 have all continued to surge to new record highs. Traders and investors have decided to focus on the potential positives from Trump’s economic shift, ignoring potential downsides from his threats to halt globalisation and a costly resurrection of the US manufacturing base.

The latest leg in an equities rally that in fact started back in 2009 (with a pause in 2015) is being dubbed the ‘Trump rally’ and his officials tweet excitedly about the impact his presidency is having on the markets.

These are the policies that are attracting the most interest:

Infrastructure splurge

Trump has pledged to spend $1 trillion to rebuild infrastructure across the country over the next ten years. That’s $100 billion a year to fix creaking roads, airports and bridges and compares with the $261 billion that predecessor Barack Obama spent over his second four-year term. And the contracts for the rebuilds are likely to all go to US companies given Trump’s pledge to stick by American companies.

The headline figure looks impressive, but in fact there’s very little detail to the plan as yet. What does infrastructure include? It may well include real-estate like school and hospital buildings. And who exactly will pay? There’s plenty of speculation that rather than coming from government coffers, the spending spree will be financed largely by the private sector incentivised by huge tax credits.

‘To launch our national rebuilding, I will be asking the Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States – financed through both public and private capital – creating millions of new jobs,’ Trump said in a recent speech.

While critics say the plan could incentivize private companies to go after profits where they shouldn’t, the plan is certainly being welcomed in the markets.

Defence spending increase

Trump has pledged to increase the Department of Defence budget by 10% or about $78 billion a year. The department’s budget is already the second largest behind social security. However, the pledge comes after a 20% cut in defence spending under Obama and doesn’t look so impressive in that context. It is also going to need the approval of Congress and defense budgets have always been the biggest of US political footballs, especially when delivered without a clear overall defence strategy. Trump’s plan is to pay for the increase at Defence by cutting other federal budgets.

Trump is also looking for value for money, forcing Lockheed Martin to cut the cost of the latest batch of F-35 fighter jets. That sort of pressure is going to eat into margins even if orders do surge.

Still, US defence stocks are rising, and the feel-good factor could well spread to European defense stocks if Trump’s pressure on Nato allies to increase their own spending bears fruit.

Tax reform

Trump has pledged to cut corporate taxes and provide middle classes with tax relief by the end of this year. That would lead to higher corporate after-tax earnings and more consumer spending power, both of which are driving investors to snap up stocks.

However, taxation is another political football, and those set to lose out under the not-yet-proposed tax changes are already lining up their opposition. The White House is going to have a tough battle to get any reforms through.

There’s a wider proposed reform of the tax system for corporations that may herald a border-adjustment tax, a similar tax to value-added tax in that it would tax products where they are bought or consumed. The US doesn’t currently have a VAT type of tax, instead taxing corporations on where they’re headquartered. Which is why many US companies have been seeking to buy foreign companies and relocate their headquarters abroad, or otherwise simply keep profits abroad. The reform plan involves cutting the corporate tax rate, and imposing an import tax to offset the taxation loss.

Dodd-Frank review

Trump has ordered a review of the 2010 Dodd-Frank act, brought in by the Obama administration to ensure there couldn’t be another crisis like the 2008 financial crisis. He called it a ‘disastrous policy’ that was crippling the US economy.

Again, it’s not clear the review will result in a reform that will pass Congress, but markets are betting it will and US banking stocks have surged as a result.

Drug pricing controls

Not everything Trump has done is positive for stocks. Pharmaceuticals have under-performed the market after he threatened price controls on drugs. The US market has typically borne the brunt of the high price of research and development, with patents allowing periods of exorbitant drug prices. Whether the new US president can counter the sanctity of a patent remains to be seen, but he certainly seems to want to bring down prices for US consumers. With Trump promising a ‘new system where there will be competition in the drug industry,’ it is clear the pharmaceutical firms may not enjoy the same bounty afforded to other industries.

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