In the first two weeks of his administration, President Donald Trump signed executive orders and presidential memoranda that deliver on campaign promises relating to trade, health care, regulation and immigration. The Donald Trump seen on the campaign trail hasn’t changed since moving into the White House, as he continues his shoot-from-the-hip style of speaking directly to the public through Twitter.
Trump’s first two weeks in office delighted supporters while infuriating opponents, extending the polarized tone of the election campaign.
After the Dow Jones industrial average broke 20,000 for the first time, Trump advisor Kellyanne Conway tweeted that the move was due to the “Trump Effect.” Conway’s celebration may be premature, as honeymoons between the stock market and presidents can be short-lived. Notably, the largest market rally in percentage terms between Election Day and Inauguration Day was after Herbert Hoover’s election in 1928. Hoover’s rally became a distant memory once the Great Depression began.
[See: 9 Ways to Invest Under President Donald Trump.]
Investor optimism following Trump’s election may be fading, replaced by concerns about populist policies and the lack of detail behind his early directives. The market may be vulnerable to a correction unless substantive and pro-growth policy details follow the headlines.
Trade policy. Trade was a high-profile issue for Trump, and many of his supporters believe that existing free trade agreements are unfair and take jobs away from American workers. As promised in the campaign, Trump formally withdrew the U.S. from the Trans-Pacific Partnership. Trump promises more action on trade, with recent speculation centering on border tax adjustments and 20 percent tariffs on Mexican imports.
Investors worry that border tax adjustments or tariffs could backfire, either by harming major segments of the economy or by triggering retaliatory actions from other countries. Retailers, energy refiners and automakers are considered among the most vulnerable to the trade policies floated by the administration.
Inter-connected supply chains between American and Mexican companies complicate any policies directed at Mexico, as an estimated 40 percent of the value of imports from Mexico are sourced from the U.S. Tariffs or import limits targeted at individual countries may create unintended consequences, as consumers may choose to import goods from another country rather than “Buy American.” For example, tariffs directed at Mexican auto production could cause manufacturing to shift to Japan, Korea or Europe rather than return to the U.S.
If Trump administration policies force an increase in domestic auto production, automakers might have to sell their vehicles at higher consumer prices, or could accelerate the trend of replacing people with robots in order to control vehicle manufacturing costs.
Affordable Care Act (ACA). Trump’s executive order directs federal agencies to diminish the financial burden of the ACA, apparently removing the individual mandate provision of the ACA. Removing the individual mandate to buy insurance is a symbolic attack on the most unpopular aspect of Obamacare, but creates many questions for investors in insurance and health care stocks.
The original economic foundation for insurers under the ACA was shaky because of the requirement to cover pre-existing conditions. Loss of revenue from healthy individuals is a significant blow to the economic viability of insurance exchanges established under the ACA, jeopardizing coverage for many families.
[See: The 7 Best Bank Stocks to Buy for 2017.]
Aetna (ticker: AET) already has announced its intention to drop Obamacare plans in 11 states, following an earlier announcement from United HealthGroup ( UNH). Aetna cited heavy losses because too many sick people are buying their plans, not enough healthy people are paying premiums and government policy changes fall short of what is necessary to address the economic challenges of the ACA.
The ACA has well-publicized flaws, but the Trump executive order creates more investor questions than answers. Going forward, investors need more clarity about how broader coverage of pre-existing conditions will be paid for, absent an increase in the deficit or in taxes.
Regulatory reform. Small companies, energy producers and banks are expected to be among the beneficiaries of regulatory reform, and Trump’s “two for one” executive order requires that for every new federal regulation, two must be rescinded. The order also directs a cost-benefit test to control the cost of new regulations.
Small companies are hopeful about the potential for less regulatory burden, though small company stock prices have stalled since year end. Trump also signaled that major changes to Dodd-Frank financial regulation would be forthcoming, potentially helping to ease the regulatory burden for banks and other financial institutions. The road for repeal or redesign of Dodd-Frank, however, is a complex one and the implications for financial stocks are uncertain until more details are available.
Immigration. Trump’s executive order banning travel from seven Muslim-majority countries created the most controversy of his early directives, spurring protests at many airports and condemnation from world leaders, politicians from both parties, and corporate CEOs. Several described the order as the wrong approach to keeping America safe, characterizing it as poorly designed and executed.
Detainees included green card holders, dual nationals and residents with multi-year visas. Most troubling is that some of those detained have co-operated or worked with U.S. armed forces and would be at risk if returned to their home country. Many of the detainees have been subject to vetting already, are integrated in this country and have been here without causing trouble. Many CEOs are vocal critics of the travel ban, particularly prominent leaders from American technology, health care and financial services companies who consider immigrants a vital segment of their workforce, and who need to maintain constructive relationships with the rest of the world.
The markets rallied after the election, as pre-election pessimism about Trump was replaced by optimism that he would deliver on promises of tax reductions for small companies, a lighter regulatory touch and fiscal stimulus. If Trump follows through with pro-growth initiatives, the market is likely to continue its upward trend, but if Trump’s populist impulses dominate the markets are likely to suffer.
[See: 7 Things That Happened When Donald Trump Met With Tech Leaders.]
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The Trump Rally: Is the Market Vulnerable to a Correction? originally appeared on usnews.com
