U.S. citizens experienced arguably one of the most contentious Presidential elections in recent history during 2016, resulting in the election of Donald J. Trump to become the 45th President of the United States. President-elect Trump appeared to connect with voters on his America First economic plan and message on bringing change to Washington. President-elect Trump will have a Republican majority in both chambers of Congress as we enter 2017. The new Administration will work with the 115th Congress and U.S. Senate to prioritize a legislative agenda for the first 100 days with the goal of fostering better economic growth in this country. The legislative priorities that have been outlined for Trump’s first 100 days which would have the most economic impact over the long-term are as follows:
I. Individual and Corporate Tax Reform
Focus on simplifying and reducing taxes for both individuals and businesses in order to stimulate GDP growth toward the 3-4% level. The Trump plan could also include a 10% tax rate for the repatriation of trillions of American corporate dollars currently held overseas. The primary goals are to provide more capital for investment activity in the United States and to create a significant amount of new jobs. We expect stock price volatility to remain elevated in 2017 and would not be surprised to see the S&P 500 trade both 20% lower and 20% higher during 2017 from its year-end 2016 level of 2238. Periodic short-term downside stock price volatility does create opportunities for long-term investors to buy great companies at attractive valuations. We continue to expect that stocks will outperform bonds (they did by a wide margin in 2016: S&P 500 total return was 11.9% versus 2.7% for the Barclays U.S. Aggregate Bond Index) as we believe interest rates are likely to rise on balance in 2017, which will make generating positive returns from bonds difficult. Longer term, we believe that current valuations for U.S. stocks imply annual total returns of 6-9% on average over the next five to ten years, well above the returns implied at present by interest rates.
The economic growth engine of this country continues to be small business formation. A rollback of the elevated regulatory
environment could be beneficial from both an access to capital and global competition perspective.
III. Energy and Infrastructure
The removal of some of the restrictions placed on the energy industry could provide more opportunities for increased investment in this country, furthering the new Administration’s goal of energy independence for the United States. Infrastructure needs could be addressed by leveraging public-private partnerships and utilizing tax incentives to spur private investment.
The U.S. stock market advanced 5% from the day of the election to the end of the year, with some sectors (e.g. financials, energy and industrials) of the market up much more based on the perception they could be prime beneficiaries of Trump’s policy agenda. As markets are forward looking, we believe that post-election stock prices in general have begun to reflect investors’ perception of better future earnings. Hence, capital markets volatility during 2017 may be influenced by the success or failure of the new Administration to work with Congress to bring forth the policy initiatives accordingly. Despite the short-term volatility that may persist during 2017, we remain positively biased toward equities over the long-term and would view a sharp decline in equity prices as an opportunity to invest in outstanding companies at attractive valuations.