We are just three days away from the beginning of a new era for the United States, and for the global financial markets. This Friday, for the first time in American history, the highest leadership position in the land won’t be occupied by a career politician or a military man. Instead, it will be filled by someone who is a businessman, first and foremost.
As we approach Inauguration day, my inbox has filled with questions about President-Elect Trump and what the next four years will bring for investors. So over the next few days, I’ll help you prepare for the incoming administration with a three-part special series. Today, I will offer my predictions for 2017 and beyond. Tomorrow, I’ll point you to the “winners”of the Trump era, including my top stock picks. On Friday, I’ll cover the "losers", which are the sectors to avoid for now.
Let’s start with my near-term outlook for the stock market. Typically, the months following Inauguration Day bring a sort of “honeymoon” period for the new President.
Americans, overall, are very fair people. So no matter who they voted for, they’ll likely give President Trump 90 days—and possibly up to 120 days—before reverting to partisanship. So if history repeats itself, the honeymoon period will likely last through April.
There’s also evidence that Congress will be more cooperative going forward. New Senate Minority Leader Chuck Schumer has a decent relationship with President-elect Trump, and he also has 25 Democratic Senate seats to defend in 2018. A more unified Congress should lead to more legislative action, including corporate tax reform, which I’ll talk about more in a moment.
Trump’s Dream Team
Looking farther out, the next four years will be unlike any other in recent history. President-Elect Trump plans to fill his cabinet with more business-minded folks and many former Wall Streeters than any other President.
First, Trump snagged Goldman Sachs’ former president, Gary Cohn, as his top economic adviser. Former Goldman Sachs’ executives, Steven Mnuchin and Stephen K. Bannon, were named Treasury secretary and chief strategist, respectively. Wilbur Ross—an investor and former banker who is known for restructuring distressed businesses across a variety of industries—has claimed the Commerce Secretary position. ExxonMobil’s CEO Rex Tillerson was selected as Secretary of State.
If the ongoing confirmation hearings go President-Elect Trump’s way, his cabinet will read like a “who’s who” of former Wall Street executives and business leaders. It’s clear that the incoming administration means business, and one of the first things on their agenda will likely be…
Corporate Tax Reform
For Corporate America, the big wild card in 2017 is going to be tax cuts. Even if the Trump administration doesn’t cut corporate taxes immediately, the companies in the S&P 500 are expected to see earnings rise 8% in 2017. With tax cuts, forecasted earnings growth could be as high as 20%. In the coming quarters, we should see plenty of market bellwethers guide higher for 2017, and the market should respond positively.
Now, whether the corporate tax rate is cut to 15%, 20% or 25%, I also expect to see more multinational companies repatriate their overseas cash. And much of that cash will go back into investors’ pockets through stock buybacks. Corporate America is already aggressively buying its stock back; given the low interest rate environment and moderate P/E ratios on Wall Street, I expect this trend to continue. And as the amount of shares outstanding shrinks, the market should melt up during the first few months of 2017.
For all of these reasons, I have a bullish near-term outlook. And I’m not the only one; economic optimism is running rampant. There is now an overwhelming perception that the U.S. will expand its economic influence around the world. On Wall Street, the benchmark indices are just shy of all-time highs. On Main Street, consumer confidence is near a 12-year high.
The bottom line is that we have a lot to look forward to after January 20. However, it always pays to have a smart stock picking strategy for any market. Through my daily blog, e-letter and special series like this, I’m always here for you, no matter what the stock market is doing.
So tomorrow afternoon, look for another post from me. In the next special feature, I’ll point you to the strongest buying opportunities for the incoming administration. Then on Friday I’ll identify the sectors that everyone should steer clear of in preparation of the changes to come on Washington.