What we heard last night from President Trump’s address to a joint session of Congress may point to significant opportunities for price improvement in the US equity markets. However, the policy priorities Mr. Trump outlined are fraught with internal conflicts that may be difficult to resolve in the process of translating ambition into legislation. More concerning for us, this package of priorities taken together could create the environment for a market bubble by taking from the future to fund the present.
Invoking President Eisenhower’s massive infrastructure initiative to create the interstate highway system, President Trump proposed his own:
“To launch our national rebuilding, I will be asking the Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States – financed through both public and private capital – creating millions of new jobs.
This effort will be guided by two core principles: Buy American, and Hire American.”
In the same speech, Mr. Trump proposed an ambitious plan to lower taxes:
“My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone. At the same time, we will provide massive tax relief for the middle class.
We must create a level playing field for American companies and workers.”
At first blush, from an American investor’s perspective, this is good news piled on top of good news. — an infrastructure spending program bigger than the economic rescue package that helped stanch the bleeding in the depths of the financial crisis, in combination with tax cuts for businesses and families. He did not stop there, however.
“I am sending the Congress a budget that rebuilds the military, eliminates the Defense sequester, and calls for one of the largest increases in national defense spending in American history.”
On a second look, this flight of fancy is going to collide with a harsh dose of Congressional and economic reality. With the US teetering on the brink of economic collapse in early 2009, and with control of the legislative and executive branches in the hands of Democrats, a stimulus spending package filled with infrastructure projects (remember “shovel-ready”?) barely made it through over the loud objections of the Republicans. Setting aside the party’s partisan determination at the time to give President Obama as few victories as possible, the reality is still that massive spending is not part of a fiscal conservative’s agenda. Doubling down by ratcheting up spending on the Pentagon at the same time as the proposed infrastructure spend would be an extraordinary break from the objective of shrinking the size of the government checkbook. Funding such spending would also be an extraordinary achievement. Cutting corporate and individual taxes, which is a dear objective of the Republicans, becomes much more challenging while ramping up spending. Shrinking the national debt, another critical goal of the Republicans, becomes a virtual impossibility unless that goal is pushed far down the road to allow the US economy to grow into the proposed lower taxes/more spending regime. Yes, the government could cut spending elsewhere to fund infrastructure and the military, but that would be a zero-sum trade and not create the kind of stimulative effect Trump’s team expects.
As always, for us it comes down to what matters for the markets. Putting to the side the economic consequences both positive and negative of immigration, healthcare, education, environmental and other policies, and forgetting for the moment that the Federal Reserve has its thumb on the scale, everything that was said in Mr. Trump’s speech would point to boom times for the US equity market. Reconciling these competing objectives into government policy will be no small task, and doing it all may be borrowing future growth to fund today’s actions. In the short term it could be good for stocks, but the risk of a bubble grows. As your flight attendant would tell you, know where the exits are. The closest one may be behind you.