The markets saw some back and forth this month but the S&P 500 closed the quarter up about 5% and even bonds managed to eek out a small gain. The “Trump rally” is moving along, and the market still buys the president’s campaign promises.
But following the capitulation of repeal and replace, Trump’s ability to push through his agenda is in question. I question what kind of impact his policies would even make. Lower taxes and fiscal spending always sound good in campaigns, but they don’t always deliver the promised results.
Stimulative policies tend to have the greatest impact near the bottom of a business cycle — when interest rates are high, employment is weak, and the economy has a good deal of slack (i.e. not operating at full potential). Said another way, when there’s plenty of upside. Stimulating at that point can spark a recovery and add momentum on the way up, providing the most bang for the stimulative buck.
Of course, we’re not at the bottom of a business cycle, we’re nowhere close. We’re literally on the other side of that, 8 years into an expansion, with low-interest rates, strong employment, and little slack. I’m guessing cutting taxes and building bridges at this point in the cycle won’t lead to a v-shaped bounce. What Trump’s policies will likely do, if successfully implemented, is buy some time and prolong this already long expansion.
Is that what markets are pricing in? I don’t know. Markets are known to buy the rumor and sell the news, maybe this is a classic case. The good news is despite all the confetti, the S&P is only up about 9%. That’s still a far way from extreme, and a run of the mill correction gets us right back to where we started.
Victor K. Lai, CFA
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