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December 20, 2016 Article 1 min read

Executive summary 

  • President-elect Trump’s pro-growth economic policies focus predominantly on tax reform, infrastructure spending, and regulatory reform. While the policy direction of the incoming administration seems clear, the devil is in the details on a host of matters. The first 100 days of the incoming Trump administration should provide some clarity.
  • Most economists expect that the economic policies that have been proposed during the campaign will be priorities for the incoming administration, but some degree of bipartisan support – and thus some compromises – will be needed to push legislation through the Senate in particular.
  • Even before the election, there were signs that inflation was building and the Fed was moving closer to tightening. Since then, markets have priced in an expected uptick in growth and inflation, and long-term bond yields have moved higher as a result.
  • Pro-growth policies should be supportive of equities on the whole, providing the underpinning of stronger growth in corporate profits.
  • One potential headwind for large multinationals and foreign equities is the potential for the dollar to continue to strengthen should growth accelerate and interest rates rise. Revenue and earnings from foreign markets would be diminished when translated back to dollars – a negative particularly for those companies that generate a significant portion of their profits outside the U.S.
  • On the whole, stronger domestic growth, the policies aimed at generating that growth, and the potential for dollar strength would all appear to favor domestic over foreign stocks, and smaller companies over larger companies.
  • Many questions remain about the specifics of expected legislation, and thus the degree to which growth could be boosted over the next few years. The market reaction in the past month suggests a degree of optimism that growth will be bolstered, carrying inflation and interest rates higher, but also boosting equity market returns.

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