The stock market’s first reaction after Donald Trump’s election victory was to stage a massive rally.
But by last Friday, the euphoria appeared to be waning as investors looked more closely at his economic promises and took stock of some of the president-elect’s bizarre cabinet choices. All the major U.S. indexes ended the week in the red.
So, what happens next? Last week, Harvest Funds sponsored a webinar with noted economist Jeremy Siegel of the Wharton School of the University of Pennsylvania, who is the author of the best-selling book Stocks for the Long Run.
The overall message: stocks should perform well under a Trump regime, but not as strongly as we’ve seen recently.
Prof. Seigel began by describing Mr. Trump as “the most pro-stock market president in history,” noting that he frequently refers to the market’s strong performance during his first term as one of his major accomplishments.
“It’s very unlikely he will introduce any policies that hurt the market,” he said.
That doesn’t mean we won’t see a correction or even a bear market over the next four years, in fact stocks are likely to underperform compared to the most recent results. But it won’t be because of anti-market actions by the president, Prof. Siegel said.
The greatest risk is that he will implement all the tax cuts he has promised, which would send the deficit soaring, force bond yields higher and hurt stocks in the process.
“As long as he does nothing more than extend the 2017 tax cuts, there will be no problem,” Prof. Siegel said. “But if he implements all his promised cuts, the deficit will shoot up.”
These would include exempting tips and Social Security payments from tax.
Here are some of Prof. Siegel’s other observations.
The Federal Reserve: Chairman Jerome Powell will remain in place until his term expires in June, 2026. “He and Trump are now on the same page and there is no possibility that the Fed’s function will be turned over to Congress.”
Tariffs: Mr. Trump sees them as a bargaining chip. He’ll come down hard on China but may be more flexible elsewhere. “I don’t think we’re going to see big tariffs on everything,” Prof. Siegel said. “It could be something more like a value-added tax, which would be less likely to provoke retaliation.” He noted that tariffs could drive up the value of the U.S. dollar by 8 per cent to 10 per cent.
Deportation: This is a promise that will be closely watched. Some action needs to be done to appease his base but too aggressive an approach will hit the labour pool and raise prices.
As for how the market will do next year, Prof. Siegel says the S&P 500 will return 5 per cent to 10 per cent, less than this year.
“But it will do better than bonds,” he concluded.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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