Trump’s Speech Sparks Short-Term Market Optimism Without Offering Specifics

If policies don't materialize, investors predict headwinds a year from now.

Investors listening to the February 28 speech by President Donald Trump to a joint session of Congress  heard the broad outline of what they have been looking for since Trump took office January 20, but they are still waiting for specifics.

Increases in spending for infrastructure, defense, health care reform and border protection were all on the agenda, but investors were disappointed because no details were presented on tax policy. Critical topics related to retirement, Social Security and closing the wage gap that were prominent themes in Trump’s campaign speeches were noticeably absent from the speech.

“Investors and traders alike have gone long the pro-growth/pro-business Trump agenda, and have maintained, for the most part, their embrace throughout the drama associated with the early days of the administration,” according to Quincy Krosby, Market Strategist at Prudential Financial.

“The question is, how long can the embrace last if it’s not maintained with the requisite needs of market participants hungry for assurance that the romance is indeed reciprocal: we need to hear that tax reform is still a top priority and that the process is constructive,” Crosby said.

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Trump’s tone was also important to Richard D. Steinberg, president and chief investment officer of Steinberg Global Asset Management, a high net worth money management firm in Boca Raton, Fla., who said “demeanor matters and his delivery had an impact on the market. The key question now is whether rhetoric becomes reality.” If Trump delivers on his promises, Steinberg noted that reducing the effective corporate tax rate could add $6 in earning per share to companies in the S&P 500 because the average large-cap company now has an effective tax rate in the mid-20s. However, any tax cut would significantly help smaller companies.

He also said any individual tax cuts for lower-income wage earners would contribute more to GDP since consumption is 60% of GDP, and any tax cuts would give more money to more people. At that point, the question is whether average Americans would spend the money or save it, he said.

How federal money is spent can also leverage GDP. For instance, Steinberg said infrastructure spending creates a multiplier of two, while corporate tax cuts do not significantly add to GDP growth.  Spending on goods and services deliver the larger multiplier effect, he said.

“So reducing the effective tax rates for smaller corporations, which currently pay about 30%,  would be beneficial and that would benefit companies in the Russell 2000 and the S&P 400,” he said.

“We are enjoying the ride right now, but we are looking for headwinds about a year from now if policies do not materialize in trade, infrastructure, tax repatriation and tax rate changes,” Steinberg added.

Trump’s speech made a positive impact on the equity market, which opened the day after the speech strongly higher, pushing further into record territory as the Dow hit the 21,000 mark. This upward market momentum, being called the “Trump trade,” is being fueled by speculation that major federal spending will occur in the Energy Equipment and Services, Industrials, Banks, Defense, Health Care and Cybersecurity sectors.

Political Reaction to the Speech
Political reactions to Trump’s speech broke predictably straight down party lines. The Hill reported that “some Republicans remain wary of the president’s approach to deficit spending. Many Democrats are already warning that Trump’s bipartisan outreach contradicts both the combative tenor of his first weeks and the steep spending cuts he’s eyeing in his budget.

“President Trump’s speech had an air of unreality because what he said tonight was so different than how he has governed in the first 40 days,” Senate Minority leader Charles Schumer (D-N.Y.) said after the speech.  “The president is simply using populist rhetoric to cloak his hard-right, anti-middle class agenda.”

Others from the investment community also voiced concerns over the lack of specifics. “The speech, albeit positively conciliatory, offered very little detail on any potential fiscal plans, especially on the tax side. Nothing on the feasibility of cross-border taxation. Nothing on plans to expense capital expenditures, very limited details on the exact timing of the infrastructure investment plan. All in all, that should leave investors with a bad taste in the mouth when it comes to fiscal prudence,” according to David Lubin, head of emerging-market economics at Citigroup Inc.

Similarly, Lewis Alexanderof Nomura Securities International Inc., said “broadly speaking, President Trump did not materially resolve key uncertainties regarding the outlook for economic policy. We believe it will take many months before we have clear answers to all of these issues.”

Social Security and Retirement Issues Absent from Speech

Among the key areas that were absent from Trump’s speech were issues related to retirement and closing the wage gap.  Both were key topics Trump repeatedly addressed while campaigning. 

The avoidance of these topics was not lost only on Democrats. f Former presidential candidate and Sen. Bernie Sanders (I-Vt.) pointed out that Trump never discussed the need to strengthen Social Security and Medicare even though these were key points in his campaign. Trump also promised voters he would not cut any benefits and “this was a cornerstone of his campaign.” Instead, Sanders said, Trump has proposed a “massive cut” to Medicaid that would affect millions of Americans. Trump also said he would reinstate the Glass-Steagall Act, but that was  not mentioned in his speech.

Sanders also pointed out that Trump said American corporations paid the highest tax rates in the world, “but this is untrue.” According to the Government Accountability Office, the IRS is losing $100 billion annually as corporations stash money in  offshore tax shelters. Sanders then urged Trump to “keep his promises to the American people.”

By Chuck Epstein

Ray Dalio Steps Down from Co-CEO of Bridgewater

Dalio, who oversees the assets of the world's largest hedge fund, will become co-CIO.

Ray Dalio will step out of the co-CEO role, and back into an investing role at Bridgewater, the largest hedge fund in the world, in mid-April, according to a client note released on Wednesday. Taking his place will be David McCormick, Bridgewater’s president of eight years, who will be stepping up to join Eileen Murray in the co-CEO role. Jon Rubenstein will be leaving his co-CEO role, but will remain a consultant.

About ten months ago, Dalio stepped into the co-CEO role to help Greg Jensen.  Dalio wrote in the client note, “Handling both a co-CEO job and a co-CIO job is tough. For that reason, we decided that Greg would shift his full attention to the co-CIO role.” Subsequently, Dalio will become co-chief investment officer along with Bob Prince and Greg Jensen.

The firm manages some $103 billion in hedge funds. Dalio noted that he has been transitioning the firm for the past seven years. “When I was about 60 (seven years ago), Bridgewater started its management and equity transition, with a goal of having others replace me. As explained at the time, we allowed for this transition to take up to ten years because we knew that getting things right would take some adjusting of the ways we did things and some trial and error,” Dalio wrote in the client note.

Below is the full client note he also released on LinkedIn:

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Because our communications often find their way into the media in distorted ways, we wanted to share publicly the below letter we sent to our clients this morning.

As you know, Bridgewater has a unique culture that works exceptionally well in our industry. Because consensus views are built into market prices, in order to beat the markets, we need independent thinkers. These independent thinkers need to have thoughtful disagreements and ways of resolving them. For this reason, our culture is a well-thought-out idea meritocracy. It requires people to be radically truthful and radically transparent with each other. This radical truthfulness and radical transparency includes looking at people’s mistakes, problems, and weaknesses as well as their strengths and talents.  Doing this isn’t always easy, especially at first, but dealing with these mistakes, problems, and weaknesses is what fuels our improvements. Some people love this forthright way of operating and wouldn’t want to work anywhere else, while others dislike it and leave. But nobody doubts that this unique culture is the force behind Bridgewater’s unique success over the last 40 years. 

Consistent with this idea-meritocratic way of operating, Bridgewater is run by a number of capable partners who can assess things independently and work together to come to the best decisions. This partnership model, rather than a single leader model, is why we have co-CEOs to run the business parts of Bridgewater, co-CIOs to run the investment parts, and co-chairmen to make sure the co-CEOs are doing a good job. We also have a team of others in key management roles who thrash things out, back each other up, and reduce key man risk. We are very fortunate to have such a broad and deep team, especially at this time of transition. 

Changes Coming in April

Any organization run by a 60+ year old that says that it isn’t in transition is either naïve or disingenuous. For that reason, when I was about 60 (seven years ago), Bridgewater started its management and equity transition, with a goal of having others replace me. As explained at the time, we allowed for this transition to take up to ten years because we knew that getting things right would take some adjusting of the ways we did things and some trial and error. We have done what we have said we would do, and we have kept you informed. The purpose of this note is to continue doing that.

I am happy to report that my transition out of management will be complete as of April 15th

As a reminder, ten months ago I temporarily stepped back into management as interim co-CEO for a one-year stint in order to help transition Greg Jensen’s co-CEO responsibilities. Handling both a co-CEO job and a co-CIO job is tough. For that reason, we decided that Greg would shift his full attention to the co-CIO role. I will be doing the same in April. As I love markets, I’m excited about this change and expect to remain a professional investor at Bridgewater until I die or until those running Bridgewater don’t want me anymore. So Bob Prince (who has been with Bridgewater for 31 years), Greg Jensen (who has been with Bridgewater 21 years), and I (who have been here 42 years) will remain focused on investing as co-CIOs. In addition, Osman Nalbantoglu (who has been at Bridgewater for nine years) continues to run our portfolio implementation and trading/execution areas, and eight of our key investment research associates will step up into senior researcher roles. These 12 people are supported by hundreds of researchers and technologists, giving Bridgewater the strongest investment team the firm has ever had and a deep bench of experienced investment professionals.

I can now permanently transition out of the interim co-CEO role because we now have confidence in the people and processes that will lead Bridgewater’s management without me. David McCormick will be stepping up to join Eileen Murray in the co-CEO role. As you know David, who is currently President, has been at Bridgewater for eight years and has been a critical part of our success. Over the last year, he, Eileen (who has been at Bridgewater for eight years and a co-CEO for four years), and I ran the business part of Bridgewater with Co-CEO Jon Rubinstein, who was new and focused mostly on technology.  We worked together to build-up our governance, management support, and metrics systems in a way that has demonstrated that David and Eileen can run Bridgewater without me as a co-CEO. Most importantly David, Eileen, and the people who support them have a proven understanding of Bridgewater and its unique culture, and they treasure these things.  

Jon Rubinstein will step out of the co-CEO role and will be leaving Bridgewater, though he will remain an advisor.  While over the last ten months Jon has helped build a plan to re-design our core technology platform and has brought in a group of extremely talented executives to build out our technology leadership, we mutually agree that he is not a cultural fit for Bridgewater. As a result, we have put in place a plan for him to transition to an advisor role in April. I really do appreciate Jon’s hard work and contributions.

Carsten Stendevad, the former CEO of the large Danish pension fund ATP, is joining Bridgewater as part of our new “Bridgewater Senior Fellowship Program,” which will bring highly distinguished individuals into Bridgewater for a year to explore what our culture is like and lend their expertise and insights to our organization. We expect a limited number of such special people to join this program in the future. 

And as previously announced, John Megrue joined me as a co-chairman on January 1st. John has been a leader in the private equity industry for over 30 years and is currently chairman of Apax Partners U.S. He brings with him a practical understanding of board governance.  Bridgewater’s oversight board now consists of current executive management members and former senior executives, as well as outsiders, which we believe is the right balance for strong long-term governance.

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