Updated on March 21, 2017
Are we all just too giddy?
As Mohamed A. El-Erian writes in the article linked below, domestic debt and equity markets reacted quite dramatically to the Trump economic platform, with interest rates spiking across maturities and equity markets rallying in the two months following the presidential election last November. There was indisputably a surge in positive economic sentiment. Yet, aside from a spike in short-term interest rates following Federal Reserve policy disclosure last week, these markets have been uneven, moving sideways with volatility, thus far this year with no discernible trajectory. What gives?
As El-Erian theorizes, sentiment is ephemeral. Markets want to see some legislative meat on the bones of this pro-growth animal. Initially, traders reacted to the promise of reduced corporate taxes and regulation, increased military and infrastructure spending, and re-negotiated trade deals favoring domestic production. What has followed in the two months since inauguration has fallen short of those assumptions: a rash of executive orders on immigration and a new “repeal and replace” health care bill introduced in the House of Representatives, both of which have little effect on securities markets (save for sector-specific investments). In short, the recent executive and legislative actions, their chosen “policy sequencing”, weren’t the economic panacea that many had hoped for.
So, what is needed to sustain the giddy markets realized late last year? Enacted reform that favors legitimate economic expansion:
- Substantive, bipartisan legislation on corporate tax reform, pushing top marginal rates down to the 15-20% range trumpeted from legislative leaders and the president, coupled with incentives for repatriation of profits and disincentives for tax inversions. New corporate tax incentives for high-growth industries to hire in America.
- Sensible regulatory reform that retains consumer safeguards and risk monitoring, while removing restrictions that are preventing corporate capital investment and R&D. Industry-specific advisory panels, advised by senior corporate management and not lobbyists, can help guide this effort.
- A spending bill that upgrades infrastructure and directly improves trade prospects (rail, highway, seaports, airports, etc.). Couple it with innovative ideas coming out of the Treasury department, such as new, longer-maturity treasury bonds that allow government to lock-in low capital costs.
- Re-negotiated trade agreements that level the playing field in areas like environmental protection and workers’ rights, without implementing trade quotas and tariffs that inhibit commerce.
- Enhanced job re-training programs to entice the long-term unemployed and displaced to re-enter the workforce in high-growth industries. With official unemployment figures contracting to close to 4.5%, a lack of skilled workers will soon become a significant impediment to economic expansion.
As theorized by Sir Isaac Newton, no object moves without a force acting on it. The White House and Capitol Hill need to re-focus on priorities that will economically help America. Do so, and that sanguine, giddy smile, the collective “animal spirits” in financial markets, has a good chance to return.