Tax Reform Watch: How Trumponomics Stands to Impact the Capital Markets– June 09, 2017

Posted by Guest Blogger Russell Moenich, Sequoia Financial Group, LLC

"What does President Trump mean for the economy?" While there is not a simple answer to the question, it is possible that “Trumponomics” stands to significantly impact our economy, the business climate and, perhaps most importantly, capital markets and the investment landscape in a way that warrants some analysis. 

What is Trumponomics?

Trumponomics is a profound, president-led ideological shift in the executive branch of government towards a pro-economic growth/pro-business political mindset. Two main tenets include: 

  1. Comprehensive tax reform through deep corporate and individual income tax rate cuts, and
  2. Significant regulatory reform. 

What Are the Potential Implications?

If implemented (and that is a big “if”), Trumponomics has the potential to ignite "animal spirits" or the spontaneous optimism among business decision makers to feel more confident about the prevailing business environment. This is a concept John Maynard Keynes, a famous economist, coined back in 1936 about the role of fiscal policy in macroeconomics. Keynesian optimism can ultimately translate into meaningful economic growth through increased productivity and employment.
 
So far it appears to be working. The National Federation of Independent Business's Small Business Optimism Index skyrocketed since the election:

taxreformgraph1.jpg
(Source: Bloomberg)

What Are the Concerns?

Presidents are often the least powerful individuals when it comes to enacting fiscal policy. The true power lies in Congress. And leading the power rankings, of course, are Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell. Given the current makeup of Congress, it really does not matter what Trump or even Ryan want. If legislation cannot get passed through the Senate, where Republicans have only a thin majority, then it will not become law.
 
Related concerns are timing and scope. Nothing may happen until 2018, and whatever does happen may not be "bigly" as hoped. The President today has limited political capital, with many believing he has not focused, and may not focus, on the stuff that really matters to the economy to get deals through Congress.
 
Finally, the President is focused on other pressing issues in addition to taxes and the economy, including nationalist and protectionist policies, which potentially could detract from economic efficiency. 

How Will It Be Judged in the Long-Term?

To ultimately be a success, Trumponomics needs to increase the economic potential of the U.S. economy. Calculated as the sum of the growth rate of productivity (economic output divided by the cost to create the output) and the growth of the working age population in the U.S., the economic potential today is around 2%, the lowest it has been since the 1950s:

http://www.sequoia-financial.com/sites/default/files/chart%25202_%25203.16.17%2520blog.PNG

Lower taxes and lower regulatory burden may help increase productivity growth, although it’s worth noting that the House’s “A Better Way” blueprint for tax reform suggests strategies that could detract, such as implementing import trade tariffs (aka border adjustment tax)

What is the Current Outlook?

In April, President Trump unveiled his tax plan focusing on significant tax cuts for companies and individuals. This could cause business decision makers to take a more optimistic view of the prevailing business environment and add meaningful economic growth through increased productivity and employment.
 
Bringing it all back to the larger capital markets and the investment landscape, the U.S. stock market has rallied since the election and has remained strong despite the ongoing turmoil in Washington. If President Trump does not come through with significant tax and regulatory reform in the future, there is increased risk of a stock market pull back. HOWEVER, in talking to many business owners across the country and industry spectrum, it is interesting to hear their confidence in the current environment even if meaningful tax reform never materializes. Their confidence stems from their outlook that now there is at least some certainty that taxes will not go higher and their regulatory burden will not increase, which is the opposite of the previous administration. This optimism alone could translate into increased economic growth and explain why U.S. equity markets have remained firm in anticipation of better times. 

Russell Moenich is the Chief Investment Officer of Sequoia Financial Group, LLC. Contact him at rmoenich@sequoia-financial.com to discuss this topic further or visit www.sequoia-financial.com.

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