The markets are about to find out that the Trump Whitehouse can do little if anything to stimulate growth in the next 12 months.
This is not a criticism, nor an endorsement of Trump; it is a criticism of the insane ramp job stocks have done since November 8th.
Trump didn’t even take office until January 20, 2017. And he is quickly discovering that Government moves much slower than we’d all like.
With that in mind, let’s run through Trump’s proposals and the potential timeline for each.
1) Tax Reform: Trump wants to simplify the tax code, lower the corporate tax rate and offer multinationals the ability to repatriate their offshore cash with a one-time tax charge of 10%.
Long-term, all of these moves are positive for the US economy. They will increase competitiveness and will allow large firms to put more money to work in the US.
However, NONE of these items will have a major impact on the markets. Yes, a lower tax rate opens the door to greater corporate profits… but:
a. As Tom Lee noted on CNBC, NO ONE gets excited about investing in a company because said company is going to be paying less in taxes.
b. Any benefits from tax reform would take at a minimum six months and possibly a year to really begin trickling into corporate results.
c. More importantly, most large corporations are already paying little if any taxes due to various gimmicks and loopholes. The Government Accountability Office found that in 2012 more than 43% of large corporations (those with $10 million in assets or more) paid no corporate income tax.
2) Deregulation/Infrastructure Spending/ etc.: None of these will likely be implemented until late 2017. A large-scale stimulus is a controversial measure that might not get through Congress. Even if it did, we already know such policies have minimal effect on GDP particularly late in an economic cycle (Bush’s Stimulus act of 2008 and Obama’s Stimulus of 2009).
3) Obamacare Repeal: having complained about Obamacare non-stop for years, the Republicans have yet to present a repeal now that Trump is in office. House Speaker Paul Ryan claims Congress will act on this by August… but anything the House passes would still need to get through the Senate before Trump could sign it into law.
So again… the earliest we’re talking about is end of 2017.
My point with all of the above is that any policies Trump implements will have minimal impact on stocks in the short-term. They CERTAINLY do not warrant the absolute mania we are currently experiencing in the stock market.
Simply put, stocks have gotten way ahead of themselves. At the earliest, major reforms will get signed into law at the end of 2017. And the actual economic impact won’t be felt into mid-2018.
And yet, stocks have erupted higher as though we’re going to see a massive fiscal stimulus plan, tax reform, and Obamacare repeal with the next 2-3 weeks.
This is the sort environment in which Crashes can happen.
And while the odds are low that we get an actual Crash… this environment is more conducive to Black Swan events than any other in the last seven years.
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