Five Ways President-Elect Donald Trump Could Move Markets
By Matt Miller
Capital Group Policy and Communications Advisor
Donald J. Trump’s Presidential victory will no doubt spark continued political and market uncertainty for some time to come. During his campaign, Trump called for spurring the economy through tax cuts and increased infrastructure spending. Given Republican control of both houses of Congress, Trump stands a good chance of enacting key elements of that economic agenda. He could accomplish this via the so-called budget reconciliation process, under which tax and spending changes can pass with a mere majority of the Senate, rather than the 60 votes normally needed to bypass a filibuster. Beyond that, there is hope that Trump’s trade approach once in office might involve tough-minded re-negotiation of some current arrangements without resulting in a full-blown trade war.
The bottom line, however, is that much remains unknown and the financial markets are likely to remain on edge in the coming days and weeks. There is still a significant lack of clarity about how the president-elect will actually govern. For example, it’s impossible to know at this point how Trump’s previous lack of verbal discipline, policy curiosity and governing experience could affect foreign affairs and economic matters. It’s also too early to gauge the eventual political fallout for both the Democratic and Republican parties. Democrats are likely to go through a significant period of strategic and electoral reassessment. But considering Trump’s repudiation of some long-standing pillars of Republican orthodoxy, it’s likely that the GOP will also undergo some degree of internal debate. It’s clearly a political earthquake with implications that investors will be digesting for some time.
Despite the potential for heightened market volatility, here are five key areas in which the new balance of power in Washington could affect the economy and the financial markets.
The president-elect has talked about an infrastructure plan of what could be at least $500 billion, based on his informal pledge to roughly “double” what his opponent campaigned on.
While many in the nation’s capital are skeptical, this effort may well include some version of a border wall intended to staunch the flow of immigrants across the southern border of the U.S., a centerpiece of his campaign. In theory, the U.S. could even give Mexico loan guarantees to borrow at very low interest rates to assist in its construction, thus making good on Trump’s promise to have Mexico “pay” for the wall. Such a huge project might come to be seen as a Keynesian-style jobs program on both sides of the border.
Meanwhile, the same drive that led Trump to put his name on skylines in New York and elsewhere seems likely to inspire the new president to embrace an infrastructure agenda that would leave his legacy imprinted on any number of new or repaired roads, bridges, tunnels, seaports, airports, sewer systems, electric grids and more. If a stimulus of the size he’s discussed were to be dispersed over a five-year time frame, it could add up to half a percentage point to gross domestic product annually over the period.
Those infrastructure projects could be partially paid for through a corporate tax overhaul. Any such deal would likely include a provision to repatriate the estimated $2 trillion of U.S. corporate earnings trapped overseas by taxing it on a one-time basis at a roughly 10% rate. This could entice companies to bring the cash back to the U.S.
Most Republicans and Democrats agree that the U.S. corporate tax code needs reform. That makes it a prime candidate for bipartisan agreement and a potent early chance for Trump to showcase his negotiating skills. During his campaign, he pledged to cut the top marginal corporate tax rate to 15% from 35%, which should have the desirable side effect of curbing inversions — transactions that allow a U.S. company to merge with an overseas firm and pay a lower tax rate in the latter’s country. This practice has become popular over the past several years, much to the dismay of policymakers.
Trump has also pledged to dramatically lower personal income tax rates. If Trump has his way in the reconciliation process, the resulting blueprint — which would also include substantial defense increases — would spell higher budget deficits in the near-term. More traditional Republican entitlement reformers, like Paul Ryan, will likely seek assurances from Trump that he’ll return to these long-terms concerns within a few years.
A president has more unilateral power to make changes to current trade arrangements than is commonly understood. That means President-elect Trump could rewrite deals to be tougher on trade partners — or use the threat of U.S. withdrawal from existing deals as a negotiating ploy to force changes in areas he deems important. While the Washington establishment fears Trump will lead us into a destructive and recession-inducing trade war, that’s hardly guaranteed. It seems more likely that Trump would see his and the country’s interests better served by a posture that flexed some unused trade muscles to arrive at better terms at the margins.
In particular, Trump has pledged to revise the North American Free Trade Agreement, which was signed by his opponent’s husband, President Bill Clinton, in 1993. He would also kill the Trans-Pacific Partnership, a result that would hurt America’s prestige in the region. Finally, Trump has called for tougher rules on trade with China, who he says has taken advantage of U.S. trade negotiators for years. He could also attempt in various ways to crack down on U.S. firms that move jobs, plants or operations overseas.
Although Trump has been vague about his precise plans for health care, he has campaigned on repealing the Affordable Care Act (ACA). Most observers believe, however, that it would be politically disastrous to simply cancel coverage for the 20 million Americans who’ve gotten health coverage under the ACA. So it’s likely that the GOP plan to “repeal and replace” the law will ultimately be implemented as a kind of “repeal and rebrand” — i.e., some scaling back of subsidies and regulations Republicans find excessive while nonetheless holding the vast majority of current ACA beneficiaries harmless. During the transition there may be market jitters for hospital and health plans that depend on the ACA’s subsidies and related supports. In the end, however, they should be able to flourish even after a GOP revamp.
During his campaign, Trump also criticized high drug prices, saying the government needs to be a stronger negotiator with pharmaceutical firms. If he follows through, that could mean a push for the government to exert its pricing power through Medicare, Medicaid and its other programs. However, the GOP more broadly is not aligned with Trump on the idea of direct price negotiations, so the outcome for now remains unclear.
Trump has called for major defense spending increases, which would probably include beefing up defensive homeland security as well as offensive capabilities. That could signal something of a reversal from the Obama administration, which allowed defense spending to decline. Of course, if growth for such expenditures picks back up, it would be welcome news to big defense contractors in industries like aerospace.
Over the long run, the U.S. economy is likely to remain one of the strongest globally no matter who resides in the White House. Nevertheless, the president has the power to execute policy changes that can move markets.
While these five areas are some of the most significant in which the president-elect hopes to make changes, he and the new Congress can affect the economy in other ways as well. For example, Trump has said he’ll roll back 2010’s Dodd-Frank financial regulation law. Trump has also said that he would pull out of the Paris climate deal and undo environmental regulations to promote fracking and the coal mining industry. That could have a negative impact on renewable energy companies and a positive one on fossil fuel firms. These steps would also be highly controversial.
In the end, a Trump administration means a significant shift in Washington policy for at least the next four years. That could worry markets initially as they wait to see how a Trump presidency actually takes shape.
Matt Miller is a policy and communications advisor at Capital Group. He has 30 years of experience and has been with Capital Group for one year. Prior to joining Capital, Matt was a senior advisor at McKinsey & Company. Before that, he served as a senior advisor in the White House Office of Management and Budget and was a White House Fellow serving as a special assistant to the chairman of the Federal Communications Commission. He holds a law degree from Columbia Law School and a bachelor’s degree in economics from Brown University. Matt is based in Los Angeles.