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.
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 Alexander of 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