Donald Trump has inherited an economy that is in much better shape than his predecessor did eight years ago. Yet President Trump also 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 US politics to measure the initial accomplishments of a new president. It dates back to 1933 when Franklin D. Roosevelt used the term to describe the first 100 days of the 73rdUS Congress. Roosevelt’s objectives were not very different from Trump’s – both men came to power with a pledge to make the US 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 cataloging his plans for his first 100 days. Among others, repealing and replacing the Affordable Care Act, withdrawing from the Trans-Pacific Partnership and cancelling many of Obama’s executive actions feature. 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 spots and use his political capital wisely.
Repealing Obamacare appears a high, if not top, priority, and one with the 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 Affordable Care Act is shelved. No alternative 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 USD 1 trillion infrastructure commitment over the next decade. However, those expecting an immediate growth boost from infrastructure spending are likely to be disappointed.
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 the President, see an avenue via lower corporate income taxes to introduce border tax adjustment, a protectionist measure which appears unlikely to be compliant with WTO rules. Others are hoping for initiatives to promote the repatriation of foreign earnings of US companies, or even pushing for reforms that lead to a 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 enthusiasm for ‘Trumponomics’ began to fade prior to the inauguration. Hopes for fiscal stimulus and a reform-led growth impulse have not fully receded, but have at least been tempered by recognition of the constraints that face virtually every incoming administration.
Our view is that the trends which began to emerge in the second-half of 2016, even before the US election result, are likely to persist, albeit in a relatively gradual fashion. US and global growth continue to improve as the global economy demonstrates resilience. Inflation appears to have bottomed in the US, Japan and much of Europe. China continues to grow steadily, even if its imbalances remain unaddressed. Recessions are giving way to improved growth prospects in Russia and Brazil.
Economic fundamentals ought to result in modestly rising global bond yields and higher equity valuations. This suggests a shift to smaller fixed income allocations and shorter duration positions, while value and cyclical stocks are likely to outperform defensives and dividend plays.
Various shocks are imaginable, but the focus in 2017 is likely to be on politics. Will populism in the US and the UK be transmitted to Europe via elections in the Netherlands, France or Germany this year? More importantly, will this lead to policies that weaken growth and unnerve investors?
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, investment and shared global purpose? Or, conversely, will Trump’s policies lead to the erection of barriers to trade and fuel international division?
In sum, Roosevelt’s first 100 days helped ensure that the Great Depression would not undermine the political fabric. Today, the question most investors are asking is precisely the opposite.
With global growth on the mend, many now wonder whether politics (of populism) will trump economics.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.