Donald Trump, perhaps unsurprisingly, broke with tradition yesterday and made comments about the US Dollar. Presidents have, as a rule, not commented on the strength or weakness of the Dollar, but Trump did away with that, saying that the greenback was too strong. “Our companies can’t compete with them now because our currency is too strong. And it’s killing us”, said Trump. Commenting on the Chinese Yuan, he noted that it was falling and the Chinese were trying to prop it up, but only because “they don’t want us to get angry”.
FINSUM: A strong Dollar is not good for manufacturing or overseas sales, but the ugly irony of macroeconomics is that Trump’s plans to impose trade tariffs will probably strengthen the Dollar further.
The Trump Rally has stalled for now, and many may be worried they missed the gains. Goldman Sachs, however, has sifted through all the info on Trump’s proposed tax cuts and other policies and made recommendations for which sectors buy. The bank has produced an interesting table which shows the net impact of certain policies—like tax cuts, on overall S&P 500 earnings, with multiple scenarios shown. The bank thinks that sectors with higher tax rates, such as brick-and-mortar retailers, energy producers, and consumer products makers are likely to benefit most from the new policies. To give an idea of the scale of the benefit of proposed cuts, even a dropping of the corporate tax rate on domestic income from 35% to 25% would give a net 8% gain to S&P 500 earnings.
FINSUM: We think this is a very good piece of analysis, as it shows concretely how much stocks would benefit, which lets one weigh that against valuations. Its suggestion of sectors is interesting, though we think retailers might be hard hit by tariffs, which could more than offset the tax benefits.
2016 was an extraordinary year for small cap stocks. They started the year down as much as 26% from their 2015 highs, only to see a huge rebound and big capital inflows, especially into small cap banks after Trump’s election. They exploded for a 21.3% total return for the year, outperforming their larger cap rivals after long-term underperformance. Now the question for investors is whether it is too late to get in. Some analysts think it is a growing trend, but others fear it is a short-term frenzy with valuations too high. One analyst from BAML summarized the situation this way, saying “You want to be more cautious than usual; the bull case for small stocks is very much based on sentiment”. One of the other big worries is that Fed starts a heavy tightening cycle just as small caps having started seeing rich valuations.
FINSUM: In our view, the future of this rally depends on Trump, as less regulation of banks and the prospect of heavy trade tariffs has driven it. If he delivers, the rally will likely continue.
Source: Wall Street Journal
Trump has made a lot of noise with his planned trade tariffs—ask Ford and Toyota, and so far it appears to have helped keep jobs in the US. It will also have a huge impact on some very big stocks. This Wall Street Journal article presents in a great chart how some large stocks will be wounded, or gain, from Trump’s proposed changes. The retail sector will be particularly affected and some of the big names to watch are Walmart, Costco, and Best Buy, which will lose big, and Home Depot, which would gain. To give an idea of the size of the bills big retailers (six of them) would face, their tax liabilities would more than double, rising from around $13 bn to $28 bn.
FINSUM: This is a major issue for some of these businesses. Take a look at Best Buy on the chart in this piece, its net income would fall from positive $1 bn to negative $2.1 bn
Source: Wall Street Journal
Famed economist Joseph Stiglitz has just gone on the record giving Donald Trump and “F” in economics. Stiglitz, who is a professor at Columbia University in New York, lambasted Trump on his economic plans, specifically in regards to his plans towards China. Stiglitz says that if Trump puts new tariffs on goods from China it will spark a trade war, which will cause a correction in US living standards and a net loss in US jobs. Stiglitz was chairman of the Council of Economic Advisers from 1995 to 1997, meaning he was a member of president Clinton’s cabinet. When asked about what grade he would give Trump in Economics, Stiglitz replied “F. He just doesn’t understand much about economics”.
FINSUM: Trump is proposing some very radical economic ideas, so it is no surprise the establishment does not agree. However, this piece is useful because it explores the possible consequences of such new policies.