Both the election and the federal funds interest rate increase at the end of last year will likely impact the economy going forward.
Let’s look at both of these events in some more detail…
The Election The financial markets response to the election results have left most experts scratching their heads. How does the stock market (generally regarded as the best indicator for future economic growth) decline 900 points as Trump secures the electoral college votes needed to be President, then open the day essentially flat, and then close that day up 240 points? Is the election of Trump to the Presidency, and the majority of both houses of Congress to Republicans, good for the economy or not? Rather than answer that politically loaded question, I believe it is more beneficial to examine why the stock market thinks the election results may be good for the economy as evidenced by the significant rally (roughly 6% in six weeks) since election day.
Some of the rally, and nobody knows how much, can be attributed to the fact that the election is over. Fear over a contested election hung over the markets on election night and, I believe, led to the 900 point DJIA decline in the overnight market. However, the stock market also appears to like a few policies that Trump supports:
Infrastructure Spending: Although both candidates supported an increase in government spending to improve our infrastructure, because Republicans enjoy a majority of votes in both houses, a Trump victory means it is less likely that partisan politics will prevent this legislation from being passed.
Repatriation of Cash: There is a lot of corporate cash overseas. It costs corporate America a 36% Federal tax to bring it back and invest it in America today. Both parties want to either lower or eliminate the tax to encourage companies to bring it home. Since both houses and the Presidency are under Republican control, there will likely not be partisan fights preventing this legislation.
Lowering of Tax Rates: This policy will likely both stimulate the economy in the short run, and likely lead to greater budget deficits in the long run. The stock market is currently reflecting the short term positive effect over the longer term problem this policy may create.
Reduction of regulation: The financial crisis of 2008 brought out new regulations in the world of finance (Dodd/Frank) and the Enron scandal of 2001 brought us Sarbanes/Oxley. Regulations aren’t necessarily bad or good. However, a reduction in these, and other, regulations will stimulate the economy. Of course the elimination, or reduction, of these regulations may lead to future abuses of customers and employees. The stock market is currently focusing on the former.
So after years of inaction by our federal elected officials (a divided government requires compromise to pass legislation and haven’t had much of that lately) the federal government is poised to bring about policies that should benefit our economy. What are the policy dangers?
In a word, trade. Trump won the Presidency by promising to keep jobs in America. Although, no one knows what Trump will do with trade, his campaign speeches focused on “fairer trade”. If he means tariffs, a trade war could break out and the results of that would be devastating to the economy. The market apparently does not believe this result is very likely at the moment.
The Rate Increase: as expected the Federal Reserve Board raised the Federal Funds Rate by .25% last month. While this move alone is not likely to impact our economy to a great extent (the rate is just 0.50% currently), this move perhaps signals a comfort level with the increasing consensus that the economy is beginning to grow more quickly. Long term interest rates have begun to move up as well, anticipating higher economic growth and higher potential inflation.
The stock market is indicating a strong 2017 and beyond for economic growth. It is worth noting however, that this economic recovery is 8 years old and perhaps getting a bit long in the tooth. Time will tell.
Doug Lagerstrom