Thursday, May 18, 2017

Trump’s Turmoil Won’t Kill The Market’s Rally

Strategists say political climate matters, but fundamentals matter more.


By Bob Sellers
MarketWatch
May 18, 2017

Uncertainty is never good for the stock market — just ask anybody who lived through the Nixon presidency. So with the Trump administration in the deepening throes of political (and possibly legal) turmoil, is it starting to show up on Wall Street?

“The unemployment rate declining towards full employment levels is a great backstop for the economy and the markets,” says Peter Mallouk, CEO and chief investment officer of Creative Planning. “It allows for Trump to make some missteps along the way that won’t be immediately punished by the markets.”



Compare that with the 1970s, during the Watergate era, when the stock market fell 45% from its peak, a bear market that didn’t end until December 1974. It was Richard Nixon’s worst-case scenario, as “a third-rate burglary” led to congressional hearings, a special prosecutor, accusations of high crimes and misdemeanors and the eventual resignation of an American president.

But that political battle may have been secondary to concurrent economic problems, with growing unemployment, rising inflation, wage and price controls, the beginning of the oil crisis, and “probably more new regulations than in any other presidency since the New Deal” (according to Herb Stein, the chairman of Nixon’s Council of Economic Advisers).

This time, the economic scenario is completely different. The new president took office with low inflation, low unemployment, and a post-election stock market fueled by optimism that Trump’s pro-business agenda with tax reform and cuts in regulation would finally add strength to a feeble gross domestic product (1.6% in 2016).

“Net-net we believe Trump is still bullish for stocks,” says David Kudla, founder, CEO, and chief investment strategist of Mainstay Capital Management. “But his policies may be moderated somewhat and longer-in-coming than many might have thought in January.”

And that is part of the risk in the stock market. Most money managers believe the market has already priced in tax reform of some kind and cuts in regulation, but believe that Trump’s problems won’t permanently change the direction the financial markets are moving — at least not yet.

“He still has a net positive impact on the U.S. economy, and correspondingly, on the stock market,” says Kudla. “Businesses will certainly have less regulation over the next four years than during the past eight. The pendulum has now swung that way. Tax reform of some kind will get passed. Infrastructure spending will be hard to get through, but would also provide at least some stimulus.”

But while the stock market has priced in a pro-growth agenda, there are some poised to react if problems continue to mount for Trump himself.

Gerry Goldberg, CEO of GYL Financial Synergies, says, “The ability of the current administration to achieve any of its goals domestically or internationally is helped or hindered by its credibility. If we reach a tipping point where the capital markets conclude that forward progress is much less likely on tax reform and deregulation, we could see at least a partial reversal of the rally that was predicated upon those changes.”

And that may explain the recent pause in the markets, and today’s weakness, as some of the drama inside the Beltway unfolds.

“Political climate matters, but only some,” is the way Cal Brown, financial adviser at Savant Capital, looks at it. Brown, the author of “When Life Strikes: Weathering Financial Storms,” says “Basically, stocks are companies, and they all have their own individual stories.” He looks at Trump’s agenda the same way. “Tax cuts are good for stocks, but they’re not dependent upon tax cuts.”

Peter Mallouk is looking overseas if troubles continue domestically. “We see stocks as fully valued, pricing in low unemployment, higher earnings and substantial tax cuts. But we see limited downside if the full tax plan doesn’t pass. Overseas, we see substantial opportunity as higher yields, lower valuations and some strength point towards more upside. The geopolitical uncertainty is not significant enough to merit a pullback to our overseas allocation.”

Stephan Cassaday, president and CEO of Cassaday and Co., likes oversees investments as well. “We’re overweight in non-U.S. markets and believe that’s where the opportunity is.” But Cassaday also believes there’s a “megatrend” going on right now that will change our lives — and he’s investing in it: biotech.

“Biotech companies are working on cures for the things that killed our parents.” Cassaday envisions headlines of the future could include, “Cancer Cured!” And he doesn’t see anything on the political landscape changing that.

“No parent is going to say, ‘I don’t like this politician so I’m not going to buy this wonder drug for my son or daughter.’”

It’s the kind of insight that comes from someone who was around during Watergate. “We’re not changing anything we do,” he says. “There are always companies that are undervalued.”


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