The Flock of Turkeys in the Trump Economy

The stock market seems to be predicting a Trump economic growth miracle, but don’t rush into growth stocks.

Lots can go wrong.

Not to put a damper on our record market highs this week, and we all are probably sick of turkey right now, but let’s consider all the turkeys that can crash this optimism-fueled market party.

Particularly with the Fed set to raise rates in December, the party might be over before it gets started, as higher rates could depress economic growth long before the president elect’s fiscal stimulus programs, tax cuts and deregulation have been enacted. Plus, the details of those programs are sketchy, Congressional approval is unknown, and even if passed their impact wouldn’t be felt by 2018 at the earliest.

So the market could drop in 2017 as quickly as it rose after the election.

The untold story of the post-election season, and an even bigger source of concern, is the extraordinary monetary tightening around the U.S. and the world. This alone could push the U.S. economy into recession.

The dollar’s strengthening after the election, to a 13-year high, will put pressure on U.S. exporter’s profits. Other ominous signs: the dramatic increase in U.S. Treasury yields to 2.3%, itself a 12-month high; and the huge bond selloff and resulting jump in yields of sovereign debt, corporate and high yield debt.

 Also bad: when indices such as the Dow Jones Industrials – which recently hit a record high of 19,000—isn’t matched by the same increases as the more sober and broad-based S&P 500 index.

I thought it was particularly telling that in Federal Reserve Chair Janet Yellen’s Congressional testimony she discounted the impact of a Trump presidency on growth given the uncertainties surrounding his policies and if they’ll be passed.  “There’s a great deal of uncertainty,” Yellen told Congress, adding that the uncertainty “will last for some considerable time.”

Further, the effect of President-elect Trump’s fiscal and tax policies are an open question. With tax cuts, who knows if companies will spend the money on hiring (given that we are almost at full employment) or whether companies will feel compelled to make new investments. It’s not like corporations are starved for cash now; in fact, companies may continue to hoard money given there’s not the demand that would compel them to spend it.

And Trump’s proposed infrastructure spending, which relies on private financing and tax breaks, is a strategy that has had mixed results in the past.

Worries of accelerating increases in the deficit loom over all these plans. Yellen has said Trump may not be able to get as much fiscal stimulus as he wants, and Congress will balk at the spending. And she’s said the deficit is already expected to rise as baby boomers retire and the levels of Social Security and Medicare will rise.

And, the government doesn’t want to use up all its fiscal powder in case the economy runs aground.

Meanwhile, inflation worries are rising. Also rising: stagflation worries. Stagflation is when prices rise but the economy stagnates, a persistent and pernicious situation not felt since the 1970s. Some Goldman Sachs economists have predicted stagflation if Trump’s more extreme trade policies are enacted.

So yes, it’s nice to have a year-end market surge, but the future is filled with potential pitfalls. Best to stick with a conservative investment plan at least until we know all the new administration’s plans and can figure out their likely impact.