There was no shortage of angst in the investment community that a Donald Trump victory in last year’s election would send shares down sharply, at least in the immediate aftermath of a Trump win. In reality, just the opposite happened, with stocks surging in the wake of his surprise victory.
The pre-election-day conventional wisdom didn’t pan out. Instead, investors quickly warmed to the idea that a Republican President and a Republican Congress would quickly enact a pro-business agenda that would fuel economic growth, and by extension, corporate profit growth.
Of course, the Affordable Care Act, aka Obamacare, was dead, right? Republicans haven’t been shy about trying to repeal President Obama’s signature accomplishment ever since they obtained majorities in the House and Senate.
Well, proposing policy changes while still on the sidelines is one thing. Enacting those changes is another.
Much like a UFC fighting match, things got ugly fast, at least from the vantage point of the Republican leadership and President Trump.
What follows is not a stance on Obamacare or argument for or against the House Republican plan to repeal and replace. There are many factors ailing the current system and we'll leave that bloodbath of arguments to the politicians.
Instead—we'd like to take a look at Capitol Hill through the eyes of a non-partisan investor who is invested in a diversified portfolio, one that includes a stake in the global economy and the major sectors of the U.S. economy.
Stocks and a political brick wall
The stock market has delivered for investors since President Trump's election, but If Republicans can’t enact their agenda, it begs the question if this would squash the so-called Trump rally? Won’t shares take a beating?
We believe the stock market reaction to the failed repeal and replace effort sheds some light as to how the market may react to the potential gridlock over tax reform.
The failure of the Republican health care plan has highlighted the deep divisions within the Republican party. No longer do investors expect corporate and individual tax reform to sail through Congress–a stark contrast to market sentiment late last year.
So, what if tax reform goes the way of repeal and replace? What does this mean for the stock market? It turned out there was little fallout in the market from the failure of Republican health care, with most major indexes rising in the week following the decision to shelve the bill (WSJ).
In contrast to health care reform though, investors have been salivating over the prospect of a cut in the corporate tax rates. Wouldn't a failure at tax reform then be cause for greater concern? While a cut in corporate taxes might be considered the “crown jewel” for the market, what investors want is respectable economic growth that produces respectable corporate profit growth.
In our view, though political uncertainty may create noise and temporarily dampen investor sentiment, in the longer-term it’s a growing economy and expectations for higher profits that support stocks.
It’s about the economic fundamentals and sticking with your long-term investment plan, which should always incorporate temporary setbacks. Investing is not without risks, but risks can be managed and market timing rarely works.
The problem with conventional wisdom
Conventional wisdom said a Trump win would clobber stocks short term. Just the opposite happened.
Conventional wisdom suggested the demise of the Republican health care plan would trip up shares. It hasn’t.
Conventional wisdom also suggests Republican gridlock and failure to enact business-friendly legislation will drive a stake through the heart of the Trump rally. While we can’t promise there won’t be some volatility, it’s a growing economy and rising profits that we should be focused on.
Put another way, if it doesn’t materially impact the U.S. economy and the economic outlook, investors have historically turned their focus back to the economic fundamentals.
There will be winners and losers among the politicos on Capitol Hill. Some of you will join in those celebrations, while others will seek solace. Ultimately, investors who maintain a disciplined approach and avoid being whipsawed by shifting bullish/bearish sentiment stand the best chance of moving closer to their financial goals.
For the long-term investor, it all revolves around economic activity and earnings growth. We've certainly hammered this theme home before and suspect we'll bring it up in future communications too.
Our sincere desire is to see our clients work toward their financial goals. Getting sidetracked by the story of the month will only serve to delay the potential of reaching those goals.
Know that we are here to serve you! If you have any questions or would like to discuss any matters, please feel free to give us a call. We're truly honored and humbled that you've given us the opportunity to serve as your financial partner.
Gary Blom & Michael Howell
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.