Wealth and the Trump Effect
The Tax Cuts and Jobs Act was meant to kickstart the economy with growth not seen in a decade. Six months in, the results are a bit lackluster. Business investment has increased only slightly throughout the last year (excluding oil and gas, which are highly volatile).1
This begs the question — how much impact do administrative and fiscal policies have on the stock market and the overall economy? It may not be enough for the individual investor to make significant changes to a portfolio, as those with long-term financial goals like paying for college or saving for retirement are generally better off focusing on personal objectives. It’s a good idea to work with an experienced financial advisor, devising a strategy based on your personal tolerance for market risk, specific goals and investment timeline. If we can help get you on track for your financial goals, please give us a call.
As for the broader market, money managers tend to consider fiscal policies as one of many variables when commenting on the economic outlook. The following is a round-up of midyear observations by several market analysts.
Citi Private Bank notes that 2018 is completely different from 2017. While 75 percent of the calmest market days for 10 years were in 2017, so far in 2018 we have experienced three market corrections and a “surge in volatility across equities, fixed income and currencies.” Citi cites the president’s policies and unpredictability as factors that may have contributed to this dramatic change.2
Goldman Sachs reported a negative fiscal outlook for the U.S. and is worried that the current policy direction could pose “a threat to the country’s economic security during the next recession.” The wealth manager predicts that the federal deficit will increase from $825 billion to $1.25 trillion by 2021, stemming directly from the new tax legislation. Goldman Sachs expects the deficit to soar to $2.05 trillion in less than 10 years, meaning the deficit will represent 7 percent of GDP by 2028. On a more personal level, Goldman Sachs expects debt held by the public to balloon as high as $28.7 trillion in about the same time. These deficits and debts make it more likely that interest rates will increase, further exacerbating our liabilities.3
However, perhaps one of the biggest issues is the concern that if the economy experiences another downturn in the near future, lawmakers may not have the ability to inject additional stimulus into the economy to facilitate recovery.4
Morgan Stanley credits years of accommodative policies by the Federal Reserve for creating today’s positive environment for investors featuring low volatility, sustained low interest rates and strong stock market performance. The wealth manager is more concerned about the natural cycle of corporate stocks and corporate bonds, currently at or near cyclical peaks.5
Blackrock believes the current environment will remain positive for investors, but it doesn’t expect performance to be as high or as consistent as last year. While the new tax bill has injected growth into consumer markets and earnings estimates, uncertainty looms due to pending trade wars and a spike in real yields.6
UBS expects corporations to invest $2.5 trillion into a combination of share buybacks ($700-$800 billion), dividends ($500 billion), and mergers and acquisitions ($1.3 trillion) — largely in is pace, corporate finance activity would account for approximately 10 percent of the S&P 500’s market cap and 12.5 percent of GDP.7
1Matt Phillips and Jim Tankersley. The New York Times. April 30, 2018. “Investment Boom From Trump’s Tax Cut Has Yet to Appear.” https://www.nytimes.com/2018/04/30/business/thetax-cut-buybacks-business-investment.html. Accessed June 22, 2018.
2Steven Wieting. Citi Private Bank. June 5, 2018. “Climbing over the wall of worry: Building enduring global portfolios.” https://www.privatebank.citibank.com/ivc/docs/ Mid_year_Outlook_2018_final_060618.pdf. Accessed June 22, 2018.
3Thomas Franck. CNBC. May 21, 2018. “Goldman Sachs: The fiscal outlook for the US ‘is not good’.” https://www.cnbc.com/2018/05/21/goldman-sachs-the-fiscal-outlook-for-the-us-is-notgood.html. Accessed June 22, 2018.
5Morgan Stanley. May 25, 2018. “Mid-year Outlook: Investors Face The End of Easy.” https://www.morganstanley.com/ideas/mid-year-2018-strategy. Accessed June 22, 2018.
6Blackrock Investment Institute. April 2, 2018. “Our views for the second quarter.” https://www.blackrock.com/ch/privatanleger/de/markte/blackrock-investment-institute/outlook. Accessed June 22, 2018.
7Jeff Cox. CNBC. June 4, 2018. “Cash-rich companies are set to pour $2.5 trillion into buybacks, dividends and M&A this year.” https://www.cnbc.com/2018/06/04/companies-to-pour-2-point-5-trillion-into-buybacks-dividends-ma-in-2018.html. Accessed June 22, 2018
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