By Poonkulali Thangavelu
The stock market’s optimism under President Donald Trump was seen in the Dow Jones Industrial Average’s passing the 20,000 mark during his first week in office. However, his temporary ban on the citizens of seven Muslim-majority countries followed and took the DJIA down from that high. Overall, the long-term impact of Trump’s policies on the market, is difficult to say.
According to Sam Stovall, chief investment strategist, CFRA Research, New York, “We see price-to-earnings ratios that are at the second highest since World War II. So I think we would need to see very strong growth in GDP, followed by an increase in corporate earnings, to keep this bull market alive.” He noted that some of the impact of Trump’s policies has already been priced in. For instance, bank stocks have been rallying since his election on hopes for financial sector deregulation. The industrials and materials sector has done well in anticipation of a boost from infrastructure spending.
On the other hand, technology stocks could be hit as a result of immigration tightening over speculation that it could limit technology companies’ access to overseas labor, which has a big presence in this sector. And retailers that look overseas for a lot of low-cost inventory could feel the impact of Trump’s trade policies, along with carmakers, if their imports are hit with taxes.
Ken Winans, president and chief investment officer at Winans Investments, Novato, Calif., is more optimistic. He said, “Stocks are not cheap if you look at a price-to-sales basis. But if you lower the tax rates, which means companies have more money go to the bottomline, you have a dramatic shift in valuation, which means stocks have more room to run over the next four years.”
Winans believes that the pendulum of financial regulation had swung too far in one direction under the Obama administration and expects deregulation, including laxity on environmental regulations, to be beneficial. And as economic growth expands and the Federal Reserve starts raising interest rates, that bodes well for a strong dollar.
Winans expects that a strong dollar will lead wealthy overseas investors to buy U.S stocks to benefit from U.S growth, while protecting themselves against a decline in their own currencies. Moreover, if individual tax rates go down and there is less interest in the tax shield that municipal bonds offer, wealthy investors could also redeploy money from these bonds towards stocks. Stovall however, expects that international equities offer better prospects from a price and valuation perspective in the next four years than U.S equities.
Another positive for the Trump administration is the Republican-controlled Congress, which should make it easier for the president to move forward with his policies. However, Winans sees trade protectionism as a wild card, considering that a trade war that escalated amongst different countries and pushed tariffs higher, which could impact the stock market.
Overall, Winans expects that the Dow could hit the 30,000 mark by the next four years, at the end of Trump’s term. Stovall on the other hand is bracing for a recession sometime in the next four years, which would not be beneficial for the long-term stock market outlook, considering that the current economic expansion is already well into its run, at 92 months. That is twice as long as every other period of expansion in the 1900s.
Moreover, Stovall points out that every Republican president since Teddy Roosevelt has run into a recession during his term in office. “Prepare for a recession in the first four years, prepare for a bear market in the first four years. Maybe some of Trump’s efforts might end up delaying when the recession starts, but I think it will certainly happen before his first term is out,” according to Stovall. However, he doesn’t expect a recession to hit in the next six to 12 months.