DAVID LAFFERTY, CFA®
Senior Vice President and Chief Market Strategist
Natixis Global Asset Management — U.S. Distribution
April 29 marked President Donald Trump’s 100th day in office. Since FDR, the first hundred days of a presidency have acquired near mythical status as a measuring stick, although it is to some degree a ridiculous standard. To be able to fully grasp any complex job in the first several months – never mind making significant headway – is difficult at best. And most jobs aren’t “leader of the free world.” Recognizing the inherent difficulty of this standard, it is still an important milestone for evaluating the president’s progress to date. While the assessment is largely political, Trump’s impact on global capital markets cannot be overstated. Risk assets have rallied hard since Election Day, and continue to make gains on the prospects for his pro-business agenda. As a result, reviewing the president’s performance so far seems appropriate given its likely effect on investor portfolios going forward.
So how is the president doing? As 100 days account for less than 7% of a full four-year term, the obvious grade is “Incomplete.” However, as a leading indicator, the first 100 days may provide a useful picture of what investors should both applaud and fear from his presidency, judged both by the hits and the misses.
AHCA: The First Big Miss
Like most presidents, Donald Trump went after the (perceived) low-hanging fruit first: the so-called “repeal & replace” of Obamacare (the Affordable Care Act). Surely with both houses of Congress under Republican control, Trump would preside over a quick reversal of the program most universally hated by most Republicans, right? Nope. The Republicans’ replacement, the American Health Care Act, was DOA – so moribund that GOP House Speaker Ryan didn’t even bring it to a vote. This of course would have mattered little, as the bill likely had no chance of passing the Senate anyway. Thus the president, and perhaps investors, have learned the most important lesson of the first hundred days: Gridlock within the Republican party may be worse than gridlock across party lines.
The failure to pass the AHCA had collateral damage as well. Replacing Obamacare was supposed to generate $400 billion in savings that Republicans could use elsewhere to offset tax cuts or infrastructure spending in a “budget-neutral” fashion.
The bill’s failure may mean that whatever fiscal progress the president can generate will fall almost half a trillion dollars short of what would otherwise have been expected. Investors should take notice. If Republicans can’t pass the one thing they all agree on (repealing Obamacare), it’s hard to imagine those same legislators miraculously coming to agreement on something far more complicated, like tax reform.
However, laying this failure at the feet of President Trump is somewhat unfair – and misses a bigger point. Division within the Republican Party was growing long before Trump was elected. The Republicans have fractured into three sub-groups: core/moderate policy wonks (led by Speaker Ryan), the Freedom Caucus in the House of Reps, and the more conservative, religious far-right. Squabbling between these factions cost John Boehner his job; it may do the same to Paul Ryan. Never was this issue more poignantly illustrated than at the high point of Trump’s first 100 days – his joint Congressional speech on February 28. Trump was lauded by Republicans (and many Democrats) for his promises of fiscal action. Meanwhile, the man over his shoulder during the speech, GOP cat-herder Paul Ryan, is unlikely to be able to deliver on those promises – at least not to full effect.
In and of itself, perhaps the healthcare debacle meant little for markets. It should however be a powerful warning sign to investors who have become enamored with stocks based on the premise that the Republican clean sweep will usher in the next Reagan Revolution.
In spite of more than a few missteps, Trump has also shown some positive traits in his first days – particularly as they pertain to investors. While the president is prone to periodic relapses (like re-litigating inaugural crowd size or media credibility by Twitter), he has shown some ability to learn on the job. Ever the businessman, Trump is not the political or economic ideologue his supporters may have been expecting.
He scored a double win by toning down his tariff talk with Xi Jinping in the hopes that China might exert more control over the unruly North Koreans. While the Chinese may have limited success, it cost Trump nothing, as enacting a 35% tariff and labeling the Chinese as “currency manipulators” would have likely been bad for growth anyway. In fact, outside of some recent grumblings about Canadian lumber and South Korean missile defense systems, the president has generally scaled back much of his protectionist rhetoric. He has survived encounters with China’s Xi, Canada’s Trudeau, Japan’s Abe, and Germany’s Merkel, all without major incident. In addition, Trump has softened his stance against both NAFTA and NATO, vowed to work with the UK to mitigate Brexit fallout, and quelled concerns about overly cozy relations with Putin by bombing a Russian-supported/Assad airbase in Syria. Dialing back protectionist talk while supporting global alliances and organizations may have at least two benefits for investors. First, it mitigates the deleterious potential effects of falling trade and rising currency volatility. Second, it reduces the political risk premium embedded in the markets – already elevated due to Brexit, European elections, and Trump’s own victory. Not to be lost in all this is the fact that Trump has muted his anti-Fed/anti-Yellen campaign rhetoric – a clear win for anyone hoping for a gradual “normalization” of monetary policy.
Overall it appears that the president is beginning to favor the pro-business, pragmatic wing of his administration (led by Chief Economic Advisor Gary Cohn, Treasury Secretary Steve Mnuchin, and Commerce Secretary Wilbur Ross) over the more ideological faction led by Steve Bannon. The AHCA debacle notwithstanding, Trump appears to be learning that tangible wins are preferable to ideological dithering. This is probably good for investors as conflict, in almost all its forms, is bad for business.
Jury Still Out
Nothing in the last 100 days has meaningfully changed our three core views with respect to Trumponomics:
Tax Reform: Trump and Ryan will likely deliver some tax reform. But it will either be 1) not nearly as large as promised, and/or 2) materially negative to the budget as scored by the CBO. As a result, the “Trump rally” remains fragile as markets could either be let down by the former, or the Fed’s more hawkish spirits could be ignited by the latter. One way or the other, investors shouldn’t be surprised by some tax reform disappointment.
Missing the Point: Too much of the market’s hopes have been pinned on the prospect of tax reform, masking other ongoing positive trends. The global economy began picking up speed in the second half of 2016, including the U.S., Europe, China, and emerging markets. Short term, this is leading to a generally positive earnings environment for companies. Moreover, Trump’s deregulatory agenda may finally spawn greater capital investment – a key missing ingredient in long-term productivity and growth. While lofty valuations remain an impediment to significantly higher stock prices, underlying corporate fundamentals are improving, with or without tax reform. This provides some support for the possibility of continued performance in equities.
Think Like a Lion Tamer: While listening to his pro-business advisors, Trump is showing nascent signs of presidential pragmatism. Perhaps candidate Trump is starting the natural transition to President Trump. Maybe. But investors should remember what Trump is – an easily agitated political novice with an itchy Twitter finger. Some lions can be trained to obey, and even learn new tricks. But that doesn’t change the nature of what a lion is – an inherently unpredictable animal. Complicating matters, Trump has come to power during a period of unique risks including Russian cyber interference, an existential crisis for the EU, a growing debt bubble in China, and the wind-down of extraordinary monetary accommodation. This would be a challenging environment for any president – even one with more experience.
Presidencies are not made or lost in 14 weeks, and neither are investment portfolios. In the near term, to deliver on tax reform, the president would be wise to operate within the constraints of what Paul Ryan can realistically deliver. With market expectations running high, something is better than nothing. In the long run, President Trump may have to learn that discretion is sometimes the better part of valor. With risks rising and valuations stretched, asset allocators may want to heed the same advice.
Information contained here is believed to be accurate and reliable at the date of printing, however, NGAM Canada LP cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and NGAM Canada LP cannot be held liable for the use of or reliance upon the information contained here.