Trump’s first 100 days: Now the hard work begins

Trump’s first 100 days in office may have acted as a fillip for global equity returns , but this most unconventional of US presidents will need to roll up his sleeves and deliver on some of his promised tax and regulatory reforms to maintain positive momentum, says Stephen Mitchell, Head of Strategy, Global Equities at Jupiter Asset Management.

The rally in global stock markets following the election of Donald Trump came about on expectations, so far largely unrealised, that his presidency would usher in a new era of low taxation, market deregulation and infrastructure spending that would boost US growth, with a positive knock-on effect for economies worldwide. Certainly, his election helped changed the mood among investors in the US, contributing to positive market sentiment and the so-called “Trump Bump”, but on the global economy, the 45th US President has also had his fair share of luck.

Trump bump, lucky Trump
Trump was elected just as the global markets were beginning to feel the beneficial effects of a renewed stimulus package put together by the Chinese authorities in early 2016 to boost an economy slowed by an anti-corruption drive. These stimulus measures have helped sustain growth both domestically and worldwide, alleviating concerns a Chinese slowdown would act as a drag on global GDP, and thus have been a helpful tailwind for Trump.
The modest recovery in the price of oil has also been a boon to the US economy just as Trump took on the presidency. After spending the early part of 2016 hovering around the $30 a barrel mark, oil has now steadied around $50 a barrel, a price at which more US shale producers are able to operate oil rigs which has led to a rebound in industrial production. Thus, Trump has benefited from two helpful tailwinds in the early days of his presidency.
That said, recent visits to Florida and Texas do uncover real support for Trump and his policies among the business community. This support has translated into surging levels of economic confidence among small businesses and rising consumer sentiment . Job creation and hiring seem to be holding up, with unemployment falling to 4.5% in March from 4.8% in October the month prior to his election. Trump, as one would perhaps expect from a businessman, has also been courting the country’s big corporations, setting up a Business Advisory Council to give seventeen chief executives from firms such as Pepsico, JP Morgan and Boeing a platform where they can influence and shape business-friendly policies. Knowing these titans of US industry have the ear of the president, and are offering a guiding hand does offer some reassurance – he does appear to listen.

Trump slump
Yet the “Trump Bump” shows signs of flagging as the three pillars on which the stock market rally has been built have looked increasingly shaky, with some questioning the gap between expectation and the new president’s ability to deliver on his promises. Talk has turned to a “Trump slump” as his failure to get his new healthcare bill passed raised questions about his ability to get other measures adopted.
Taking a look at each pillar separately,
• Tax reform
• Infrastructure spending
• Deregulation
We believe this pessimism over delivery may be becoming overblown. In our view, Trump will have some marginal scope to deliver on tax, can make significant headway in the area of regulation, but is likely to disappoint on infrastructure.

On tax reform
Because the US has a relatively high corporate tax rate of 35%, many US companies choose not to repatriate profits they make from their overseas activities. It is estimated that the 500 largest US companies hold between $2.1tn and $2.5tn in cash overseas in order to avoid what they view as a punitive tax rate. Repatriation of this overseas cash has merits which are recognised across political parties which may ease its passage. A repatriation ‘tax holiday’ where companies are given a temporary window in which their overseas earnings are only taxed at a proposed 10% rate, could see a lot of money returning to the US which could be used for investment or M&A. It should, in our view, be possible to implement, in that it would not require budget cuts to be made elsewhere to change the law, and is thus a win-win for Trump’s “America First” policies.
Other tax reforms, including cutting corporate tax to 20%, are likely to prove far more problematic. These tax cuts would have to be paid for by difficult budget cuts elsewhere, and with the country already $19tn in debt, appetite for such reforms may be limited. There is a significant cross-party movement to restrain America’s already high level of indebtedness, rather than increase it.

On infrastructure spending
Time is Trump’s greatest enemy here. It can take a minimum of five years to get work started on large infrastructure projects such as new highways, transport systems, bridges and airports. He may make announcements in this area but any positive benefit to the US economy is only likely to be felt long after Trump’s first (and possibly only) term.

On deregulation
As for cutting red tape, many rules and regulations governing business come from regulatory bodies where Trump can directly make the key leadership appointments. The one caveat is that his administration has been slower than most in making those appointments. At a legislative level, Trump has had some modest success in his first 100 days; he managed to push through an internet privacy bill that will allow some companies to sell-on information on consumers’ internet habits to other firms who are then able to market goods and services to them. Unlike the passage of the healthcare bill, Trump should find a Republican-dominated Congress is amenable to a further loosening of the regulatory burden on US businesses, especially in the financial arena.

Trump, all hands to the pump
For his first 100 days in office, Trump has managed to chalk up some modest achievements, but there remains much work to be done to satisfy expectations. Whereas he started his presidency with a few favourable tailwinds– Chinese stimulus, higher oil prices– he now faces a formidable headwind in the form of the US Federal Reserve. The US central bank seems determined to pursue its policy of raising interest rates closer to a neutral rate in 2017 amid concern over a tightening labour market and rising asset prices. Higher interest rates mean the average US consumer will see more of their income being used to service debt, with less money available for discretionary purchases. As a global equity manager, a slowing US economy would be of concern to me, as it would almost inevitably lead to a drop in US demand for global goods and services.
The political calendar is a second potential headwind. Trump may only have 18 months to implement his key reforms on tax and regulation before mid-term elections due in November 2018 usher in a new Congress that would be potentially more hostile to the president’s policies. While such a deadline may seem daunting, Trump has shown an ability to adapt quickly to situations and to take counsel in order to achieve his goals. His first 100 days in office, while not an unqualified success, have demonstrated his unconventional approach is not always a barrier to policy implementation, and his flexibility in dealing with problems may turn out to be a strength.

In short…
In summing up Trump’s first 100 days it is true he has succeeded in raising expectations and confidence to an unusual degree, which has had some real impact upon intentions to hire and to invest. Some deregulation measures have already been passed. Where he has most work to do is in better working the political machinery in Washington to achieve at least some part of his tax reform plans.
Anticipation of these tax changes has created a “wait-and-see” attitude amongst some US corporations which if disappointed would not help an economy that on many counts can be described as “late cycle”. Trump could possibly prolong this cycle if successful and if he focuses on domestic issues not international geo-politics.
Euphoric investor expectations have inevitably returned to earth as they always do post-election Inauguration Day. Asset prices, and particularly US Treasury bond yields, now reflect a high degree of scepticism, especially concerning tax reform, compounded by worries about the economic effect of Federal Reserve interest rate hikes. Thus for Trump the hard work really starts now and he needs to choose his battles carefully. Separating out repatriation of overseas trapped cash from other tax reforms and making headway on this would be a sensible start. Currently consensus is that this is difficult. One thing that Trump’s first 100 days have shown is that the famous “checks and balances” in the US constitution do work and that he needs to better manipulate the political levers to achieve his goals in a divided political environment.

Stephen Mitchell – Head of Strategy, Global Equities – Jupiter Asset Managemen