Behind the record-setting bull market was the belief that the Trump agenda would reduce the regulatory state, pass tax reform, and create a pro-business climate that drives stocks upward well into the future.
Those expectations are beginning to change… there is fear the agenda may not be enacted.
Although Congress’s tax reform plan was met mostly with praise from conservative circles this week, that has not changed the growing fears in the business community. As reported by Marketwatch.com, the CFO Signals™ Survey is showing a dramatic shift to pessimism by the leaders of companies in the U.S., Canada, and Mexico with revenue exceeding $1 billion per annum.
Overall, the data reflected a 15% drop from 44% optimism to 29% optimistic in the last quarter regarding future revenue. In the manufacturing sector, the decline was even steeper, going from 52% optimism to 22% optimistic. These were some of the largest shifts downward in the survey’s history.
The big risks to the economy we have listed many times before, but with each passing month, they are now apparently impacting the leaders of our nation’s largest corporations. They include but are not limited to:
I. What market risks have American business leaders growing more pessimistic?
- Geo-political risk. This is repetitive, but obviously the growing verbal tit-for-tat between President Trump and North Korea has increased the risks of war in the Pacific Theater. Even without war, the increased costs of insurance, of changing distribution points and shipping, are already affecting the bottom line costs of global supply lines. That, in turn, will raise the costs for consumers.
- Stalled Trump agenda. While most blame the incompetent Republicans in the Congress, assigning blame most agree is a fruitless exercise for business leaders. The bottom line (which affects their bottom line) is there is little visible hope for meaningful tax reform on the horizon. If we get something, will it be too watered down to have the dramatic impact on the economy that they were hoping for? The odds are something may pass by late 2018, but that is just window dressing for the economy. While high corporate taxes are always passed on to the consumer, they still drag down sales, since the consumer buys less of something that costs more. Lowering the corporate tax rate had been a high priority… CEO’s can now only hope they see some meaningful reductions. Regulatory burdens have been lifted, but not broadly based – mostly helping just the energy sector. The hopes of repealing Obamacare have been dashed. The expected surge in GDP that would come from free market legislation has instead become the realization that little, if any, of a pro-growth agenda may pass.
- Trump’s unpredictable responses to a changing environment. Does frustration with Chinese inaction on North Korea lead to a trade war? Do relations with European countries affect trade or our commitment to NATO? Does debate over a border wall upend trade with Mexico? The “Trump Factor” – so positive for the business climate from the election until recently – now appears to be an issue of uncertainty, and business leaders loathe uncertainty.
- Capital markets negatively impacted. So far a weakening dollar has driven foreign money into U.S. equity markets, and there has not been a dollar liquidity issue. But many fear continued Fed tightening (which may now be ahead of the inflation curve) and foreign competition that is highly motivated to diversify out of dollar holdings, will lead to a disruption in capital liquidity.
But shouldn’t there be cause for some optimism? If a bill can get out of Congress, Trump will sign it, and the Congress has an incentive to do something positive before the 2018 elections.
II. What are the reasons for optimism in the market and economy?
- Geo-political risk has always been with us. The entire Middle East collapsed on President Obama’s watch, which temporarily drove gas prices up on multiple occasions during the last Administration. While there were dips along the way, the market has remained elevated for some time. The Trump Factor and the degree of risk with North Korea are substantial, but so was the Russian invasion of Crimea. Perhaps the risk wasn’t as great since the entire planet knew President Obama would not do anything about it, but nonetheless, we certainly have known that calamity could strike the country and our markets at any given time.
- Congress could actually do something right. They should be highly motivated to take action – since the midterm elections could be nasty if they don’t have something to show their constituents. While media debate can provide the impression that the country is split on Obamacare, that is not the case in most Congressional districts held by Republicans, where the expectation of repeal was a clear majority. Tax reform is near Biblical canon for the Republican Party, and to have talked about but not passed any serious tax legislation by 2018 seems impossible to fathom. Bottom line, CEO concerns are real, but it seems almost impossible to imagine Republicans won’t pass something from the Trump agenda before the 2018 election.
- Trump’s unpredictability helps, not hurts, potential market and GDP gains. The public elected Trump as a disruptor, and wanted him to disrupt the Swamp in DC. When he tweets or seems to create a furor that the mainstream media then attacks him for it – it gives comfort to 40-50% of the public that he is doing what they sent him to do. In a deep sense of irony, the chaos created by Trump often encourages a large sector of the public in their daily routine, and that keeps them buying, selling, and engaging as they would in the marketplace. Could he spark a trade war? Of course, but most of the public knows what CEO’s ignore – any trade war can be damaging, but the US never loses in a trade war, everyone wants, and needs, to trade with us.
- Capital Markets will be just fine. Forward guidance from in-house analysis teams such as Putnam Investments shows no risk to liquidity or capital markets. Fear over such disruption is usually unfounded, capital flows for the dollar benefit the US in either direction. The liquidity fears relate to a system-wide collapse in 2008, which such risks are out there, but then every asset class will have collapsed, and there would be no safe haven (unless, of course, you invested in index annuities, which allowed our clients to safely avoid the 08 collapse).
CEO pessimism in the U.S. stock market and the U.S. economy is based upon well-founded fears, and you should consider safer investment allocation given those fears. There are good reasons to have comfort in our current state of affairs despite the chaotic social order we see on television. However, at the same time, the market cannot go up forever. At some point, genuine fear is proven correct. Some of the most informed investors are further diversifying their retirement money to achieve greater levels of safety and volatility protection while still maintaining reasonable rates of return. That is often achieved through diversifying into non-traditional safe money assets like the index annuity. Call 877-912-1919 to speak with one of our qualified financial advisors to learn more!