A Note to Our Clients
November 9, 2016
Expect Policies Which Will Boost Economic Growth.
- The financial markets are relatively calm this morning after selling off sharply last evening when the initial signs of Mr. Trump winning the election began to surface. We will now find out how much of what Mr. Trump said during the primaries and the race to the White House he meant and how much was posturing. With a Republican controlled Congress and a group of seasoned business leaders surrounding him as advisors and cabinet members, we expect the President-elect to move from his extreme positions to more of a right-of-center position which puts in place more pro-growth policies.
- In our view, Mr. Trump espoused his extreme positions on many topics to get America’s attention, and did he ever! The Donald Trump we saw on the campaign trail will not be the Donald Trump who will be the Leader of the Free World. Take foreign trade, for instance. We have always been “free traders,” but we have also always supported “fair trade.” We believe Mr. Trump’s stated positions on trade policy over the past 17 months are opening salvos on trade negotiations, not the likely policy positions to be pursued.
- Trump has a pro-growth tax agenda in terms of lowering the corporate income tax rate, repatriating the overseas profits of U.S. multinationals — spurring business capital spending and hiring — and a simplification of the personal income tax code. We expect the President-elect to promote the domestic energy industry, from big integrated oil companies to drillers and pipeline companies. In his acceptance speech last evening, Mr. Trump emphasized his plans to ramp up infrastructure spending across the country, stimulating growth and job creation.
- While Mr. Trump has stated that he would replace Janet Yellen as Chair of the Federal Reserve because he feels she has been too dovish in terms of raising or “normalizing” interest rates, keep in mind that there are six other governors of the Federal Reserve System who are voting members of the Federal Open Market Committee. Additionally, there are twelve presidents of Federal Reserve Banks who also serve, in rotation, as voting members of the FOMC.
- The Federal Reserve has a Congressional mandate to pursue maximum employment, stable prices, and moderate long-term interest rates. Within this structure, we do not expect a radical change in policy at the nation’s central bank, irrespective of who the chairperson is. Remember also that fixed income investors ultimately control the bond market and yields on marketable securities beyond one to two years to maturity.
- Should the Federal Reserve take a more hawkish turn in the aftermath of the Trump victory, yields on longer maturity fixed income securities would decline as the market discounted slower growth and moderating inflationary pressures, partially or wholly offsetting the tighter monetary policy being pursued by the Federal Reserve. As a final thought on the Federal Reserve do not be surprised if Janet Yellen resigns her position as Chair of the Federal Reserve before her four year term is set to end in February, 2018 if she felt the President-elect did not support her continuing in that position.
- We also expect Mr. Trump and the Republican Congress to roll back huge swaths of ObamaCare, but exactly how is unclear at the moment. The massive regulatory burden that has enveloped the business sector over the past eight years will be addressed and rolled back, unshackling the “animal spirits” of the private sector of the economy.
- Yields on longer maturity securities are likely to rise a touch over the next year. When you combine an outlook for healthier economic growth with the 2.8% year-on-year rise in average hourly earnings contained in last week’s payroll report — compared to 2.1% – 2.2% in the summer of 2015 — we look for the yield on the ten-year Treasury note to move toward a 2.0% to 2.5% trading range in short order.
- This great Republic of ours was made to deal with the vicissitudes that take place over time, particularly in the political arena. Look back over the history of this great nation and the numerous challenges that it has faced and overcome. America has survived bitter elections before and it will again, allowing our great nation to continue to thrive and prosper. We look for further gains in common stock prices with corporate earnings recovering and pro-growth economic policies on the horizon.
Pierre G. Allard
Joseph T. Keating
Chief Investment Officer
The opinions and ideas expressed in the commentary are those of the individual making them and not necessarily those of CenterState Bank of Florida, N.A. The statistical information contained herein is obtained from sources deemed reliable, but the accuracy of such information cannot be guaranteed. Past performance is not predictive of future results.
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