The U.S. economy continues to show signs of stress, but there is optimism in the air with the new guard coming to Washington D.C. It will be nice to see pro-growth policies come back to the White House after years of wasted opportunities from the Obama administration. When Obama was first elected, I agreed that there needed to be some type of government stimulus to fuel the economy over a multi-year period to help the economy continue to recover from the Great Recession. But even that stimulus plan was botched through what Obama jokingly claimed were â€śshovel-ready jobs that werenâ€™t so shovel-ready.â€ť In addition, the President and his fellow Dems went for a power grab in the form of Obamacare, when they should have focused their efforts on why Obama was elected in the first place: to put Americans back to work. Instead, after 8 years of Obama, we now have over 94 million Americans not in the workforce, stagnant wages, Obamacare collapsing on itself, and an economy that could slip back into recession at a momentâ€™s notice. This leaves us in the same position we were in 8 years ago, where the new President should enact a proper stimulus plan to rebuild our nationâ€™s old infrastructure and provide badly needed jobs over the next 2 to 3 years. While this will most likely add to the deficit, a comprehensive stimulus plan could go a long way in rebuilding America (which most agree needs to be done), putting people back to work, stimulating the economy, and expanding the tax base with newly hired Americans. This all seems like common sense, but we know that there has been a shortage of that in Washington D.C. for quite some time.
In addition, Trump is now forming a major tax cut package for the middle class, while most high earners will notice little change to their tax bill since they will receive a tax cut too, but will also lose deductions at the same time. Tax cuts should have an economic stimulus effect too just as Reaganâ€™s tax cuts provided an economic boost throughout the 1980â€™s. So when you combine an effective stimulus package with tax cuts and deregulation on corporations and small businesses, you can get renewed optimism, which is the long-term fuel for economic growth. Basically, if Trump does the opposite of what Obama did in his first four years, I think Trump will have a good shot of delivering on his campaign pledge to get our economy growing at 3% GDP or better. If Trump can deliver that type of growth, he wonâ€™t have a hard time being re-elected for a second term, but it is a tall hill to climb to reverse the damage that has been done. However, I am glad that we live in America where a turnaround like this is even considered a possibility since I have serious doubts that the EU could even think that such a rebound can be accomplished, let alone being able to actually pull it off. In fact, I mentioned to clients in my email about 15 years ago that I gave the EU about 20 years before it would begin to collapse. It appears I was too optimistic on the EU lasting, but it seems as if Brexit, Trump, and now an Italian referendum are pointing to the EU collapse to accelerate in the coming years.
The â€śTrump tradeâ€ť appears to show no signs of losing steam and as we enter December so the question is: Are we now on the verge of a Santa Claus rally to add to the recent gains in equities? I think the answer is â€śyesâ€ť since we are seeing what a little optimism can do for investors as stocks are still hovering around record highs ever since Trump was elected. However, that optimism has caused many investors to reduce their bond holdings in favor of more risky stocks since the outlook for an improved economy certainly went up with Trumpâ€™s shocking victory. While I remain optimistic on equities, I do think that it is finally time to worry about bonds if you are heavily invested in government bonds. However, I have been recommending a defensive position in the bond market to my clients for a couple of years now so I have been preparing client portfolios for this type of environment regarding interest rate sensitive securities. I am not recommending that clients abandon the bond market in favor of equities; in fact, I am recommending that most of my clients make no changes to their portfolios until we finally see the details of what a Trump administration will roll out on a number of issues that could affect stocks and bonds in the long-term.
Overall, I think now is an appropriate time to be bullish on equities and exercise caution on bonds through a diversified and defensive allocation. In addition to that, I think it is prudent to not make major changes to portfolios in the 3 to 6 months after a Presidential election.
Just a Thought
â€śThe one important thing I have learned over the years is the difference between taking oneâ€™s work seriously and oneâ€™s self seriously. The first is imperative, the second is disastrous.â€ť
-Margot Fonteyn, ballerina
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