The Good, The Bad, The Ugly of Trump's Economic Policies
Nick Sargen, Senior Vice President, Chief Economist and Senior Investment Strategist for Western & Southern Financial Group and Fort Washington Investment Advisors
After the outcome of the 2016 election caught most investors off guard, the stock market rallied and was eventually up 35 percent. All investors expect the market to fluctuate and, of course, the challenge is having the skill needed to be able to predict those ups and downs. Navigating the market with a businessman in the Oval Office instead of an experienced politician has added a new layer of complexity.
“I can’t think of a single person who forecasted the market to be this strong at the time of election,” says Nick Sargen, senior vice president, chief economist and senior investment strategist for Western & Southern Financial Group and Fort Washington Investment Advisors. “Despite the pessimists saying, ‘This guy has no experience,’ the market rallied for the 15 months between the day after Trump won the election to January of 2018. Plus, what makes this market even more unique is that we’ve been in a bull run that began in March of 2009 where it has steadily been rising and is the second-longest bull run on record.”
Because of Sargen’s occupation, he fielded many questions from friends and family who were nervous about their investments after President Trump was set to take office.
“I would tell people to just ignore the tweets and focus on the policies that will last,” says Sargen. “The comments will hit the news and then go away, but the economic policies that his administration is passing is what you need to pay attention to.”
Perhaps the frequent inquiries prompted Sargen to write his book, “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”
“To borrow from Clint Eastwood, we need to look at the good, the bad and the ugly of Trump’s economic policies,” says Sargen. “The good is the corporate tax cuts. The bad is the lack of tax reform. And the ugly is the possibility of an unnecessary trade war.
“From the get-go it was clear that the Republican agenda was to lower the corporate tax rate, which was one of the highest in the world. The argument was that it made it difficult for American companies to compete globally and there was a lot of outsourcing.
“So here is ‘the good.’ Corporate tax rates were cut, which investors believed would give companies more profits and make the stock market better. Tax cuts stimulate the economy and give it a boost in the short run. Obama was criticized for not being business-friendly, but Trump’s tax cuts and deregulation have really encouraged small businesses, which feel the effects of compliance costs the most.”
For ‘the bad,’ it’s important to look back at the past to better understand today. Sargen has noted that Trump is following after some of Ronald Reagan’s economic policies that included tax cuts.
“With Reagan in 1980, I believe we got that rare leader that made a complete transformation to a country’s economy,” says Sargen. “Even though they are enforcing similar policies, these two presidents inherited exact opposite situations. When Reagan came in, the U.S. inflation rate was the highest in post-war history and interest rates were the highest on record.
“Reagan brought these down by allowing the Fed to have a very tight monetary policy to tackle inflation while also cutting both personal and corporate tax rates. The problem with cutting taxes is that the government doesn’t collect revenue and it adds to the deficit. To make up for the shortfall, the government must issue debt, which causes bond yields to rise in real terms after adjusting for inflation.”
This is exactly what happened until Reagan entered his second round of tax changes.
“Reagan set out to have a tax reform that would be balanced and revenue neutral,” explains Sargen. “And our economy grew. Tax cuts are very different from tax reforms.
“Now, here comes ‘the bad.’ Paul Ryan’s original bill before the election was a tax reform that aimed to not affect the budget deficit. Then Trump overruled them and went for tax cuts. The debate now is when will we see the consequences of the government’s deficit. Many people were already expecting the deficit to blow out with our aging population getting picked up by Medicare and Social Security – without the newly added pressure of the tax cuts. We need to look out for it.”
Finally, President Trump has been very vocal on his thoughts concerning the United States’ commerce with other countries.
“International trade is an important sector of the U.S. economy, but not as important as it is to other countries,” explains Sargen. “U.S. exports are about 12 percent of our economy while imports are about 15 percent. However, our personal savings rate is one of the lowest in the world at about 5 percent, which indicates we are investing more and basically getting financing from the rest of the world.
“Trump is a businessman and sees everything as a negotiation. When it comes to trade, he’s looking to see if we import more than we export and, if we are in a trade deficit, he sees it as, ‘We’re bad negotiators and the losers.’ Economists don’t see individual trade deals like he does. Most believe trade imbalance is more about how much countries save and invest rather than individual tariffs on particular products.
“I feel a trade deficit is affected by many factors. Right now, we import more products from China than we export back to them, but China buys our bonds and other assets, so they have an invested interest in us.”
One recent example of a successful relationship with a U.S. trade deficit was with Japan.
“Japan began advancing in technology, and we bought their cars and their toys and their computer parts,” says Sargen. “They got some of our products, but what they really wanted was U.S. assets to diversify their investments. We got their goods and they got our paper.
“I think ‘the ugly’ is the uncertainty of Trump’s threat of protectionism. Trump will say trade is fair when there’s a balance. In the post-war era, the only time there was a trade balance was in the Soviet bloc where only communist countries traded with each other. There was obviously no growth there.
“Because we don’t rely on outside trade as much as other countries, Trump is right that they will initially feel the impact more than America. However, if their economies weaken, they will end up importing less from the U.S., which will hit our economy. Maybe Trump is taking a hard stand as a negotiator to eventually reach a desired compromise. Or if we go in all guns blazing and put tariffs on all Chinese goods coming into the U.S., China will be forced to retaliate.”
It is hard to predict the impact new international trade policies would have on the U.S. economy.
“After recent tariffs were placed on steel, costs for Harley Davidson went up and, in order to protect their investors’ returns, they outsourced jobs – even after they benefited from the corporate tax cut,” says Sargen. “Plus, after we put tariffs on European products, the EU imposed a tariff on some American goods like Harley Davidson motorcycles.
“If there was one thing that would cause me to warn people to reduce their exposure to the market, it would be how investors assess the risk of getting into a trade war with China and Europe, and possibly with Canada and Mexico. Many people dismiss Trump’s comments and say it’s a bluff, but I have to take the threat seriously. This ugly uncertainty regarding trade policy really is the wild card.”
Western & Southern Financial Group is located at 400 Broadway Street, Cincinnati, OH 45202. For more information, call 866.832.7719 or visit www.westernsouthern.com.