The US just went through one of the most contentious presidential elections in recent history. With the surprise win of Donald J. Trump, the nation and thereby the world is geared for radical changes and direction.
Cabinet appointments so far still seem rather mainstream, although the number of generals appointed as well as those still in the running may raise some alarm down the road. It will be far more intriguing to track the pundits’ comments of Trump’s four-year term since their judgements are so colored by their own political viewpoints. One thing we do know with great certainty is the Trump priority list during his first 100 days. The repeal of Obamacare most likely tops the list. Immigration and the Wall are likely up there along with tax cuts and infrastructure rebuilding. The relaxation of regulations such as Dodd-Frank should also be a priority, which would be welcome news in the business community and financial markets.
With the exception of the revision of Dodd-Frank, all of the above issues are likely to be inflationary. With Janet Yellen and the Federal Reserve forever itching for a rate hike, there likely will be a collision of forces that eventually drives the inflation rate considerably higher than the Fed’s 2% target. The key remaining element is when does supply side economics kick in, if it ever does, and lift the US’s paltry growth rate from the 1-½% level to a 3-½ and perhaps 4% level? In the interim, what will deficits look like? These will be the issues going forward and therein lie the risks.
Until this moment of truth, we believe that there will likely be a honeymoon period especially since Republicans continue to hold the House and Senate. Nevertheless, the focus and therefore the strategy for the stock market most likely will be considerably different from the last eight years. We venture to bet that significant changes in market leadership, not just in stocks but sectors and industries, are necessary going forward.
As for the bond market, regardless of what President-elect Trump’s grand designs may be for Chair Yellen and the Federal Reserve, we believe that interest rates are on a long march northward, but at an ever so gradual pace.