FINANCIAL SENSE: WHY THE TRUMP RALLY?Submitted by Raleigh, NC Financial Advisor | Golden Years Advisors on February 28th, 2017
Since Donald Trump won the Presidential election last November, the stock market is up over 9%. Last week, we watched the Dow Jones Industrial Average (DJIA) close at record highs for 9 consecutive days.
We keep hearing two questions: “why” and “how long will this last”?
In today’s blog we want to try to answer the first question: animal spirits. That was the phrase that Maynard Keynes used to describe the optimism that gives investors “a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities”1. This spontaneous optimism is based mostly on an expectation rather than a certainty that something “good” will soon happen.
“What’s good about Donald Trump being President” is a question that many liberal and some conservatives are asking. Without a doubt, President Trump will most likely be a very different president than most of his contemporaries, but like other Presidents of the last 116 years, he has made several proposals which the man-on-the-street KNOWS that if Washington (Trump + Congress) delivers on SOME of these promises, then typically the U.S. prospers:
- Tax Reform: lower taxes for individuals and business typically makes the economy grow.
- Less regulation: businesses are more profitable if they can operate with less restrictions.
- Repatriation of profits: trillions of dollars of U.S. profits that are currently kept overseas may soon be brought back to the U.S. and invested in our economy or distributed to shareholders.
- Increased infrastructure spending: more short term jobs and hopefully long term productivity improvements.
Any one of these can have a big impact on the economy and the market. Let’s just focus on one part of tax reform – lower corporate taxes. To be fair, no one knows what specific tax reforms will eventually be passed by Congress. Two examples are proposals by President Trump and another by Speak of the House Paul Ryan, but the chart below shows you how dramatic the increase in profits could be from these proposals:
As the chart shows, U.S. company profits could increase from 7% - 40%+. No wonder markets have rallied 9% since the elections. In our next blog we will attempt to shed some lights on the 2nd question: how long will this last?