The policy halo effect that provided ballast to the stock market and fueled investor optimism is already being dimmed by political realities, according to Goldman Sachs, which may have negative implications for economic growth.
In a note to clients on Friday, the investment bank noted President Donald Trump’s agenda was already running into bipartisan political resistance, with doubts growing about potential tax reform and a repeal of the Affordable Care Act, among other marquee Trump administration initiatives.
Just two weeks into his tenure, “risks are less positively tilted than they appeared shortly after the election ,” Goldman wrote. Growing resistance to Trump’s executive orders on immigration and financial reform has galvanized opposition while dividing members of the president’s own Republican Party.
It has also curbed the enthusiasm of investors, who sent stocks on a roller-coaster ride this week as they struggled to reconcile the new restrictions on immigration with Trump’s professed pro-business bent.
Companion reading, looking at Trump’s presidency from the lens of a private equity deal:
Trump’s election and the subsequent leadership style fit all the hallmarks of a traditional private equity deal.
Think about; first he appeals to the existing shareholders (citizens) making the case that the business (country) is significantly undervalued because its been run so poorly by its current management. Having then “acquired” the country he starts immediately making strident changes unencumbered by any concern for the politics of the remaining management staff.
From this perspective, and if you’ve had prior experience of private equity, it’s relatively trivial to extrapolate how other things will play out:
He will lead with a razor focus on maximising short-term gains to ensure there’s maximum uplift in “valuation” before flipping the country to the next owner. What does this mean? Well, if you look at his recent approach to environmental & financial regulation he’s identified that repealing these will give an immediate boost with any downside risks being delayed until well past his ownership.
He will look to replace expensive, capital intensive items with much cheaper substitutes that may look and operate the same. In some places this will be successful and a considerable amount of waste will be stripped out. But in others this will lead to an ultimate debasement of the brand.
Partnerships (trade, geo-political etc.) will be reordered such that those that focus on delivering immediate benefit to the valuation will be prioritised whilst those that may present a longer term opportunity will be neglected.
Ethan Harris at Merrill Lynch:
One of our key views is that some analysts are underestimating the risk of an uncertainty shock to the economy in the coming months. … Thus far policy actions by President Trump have generally been positive for the markets and the economy. His most aggressive economic policy actions to date involve using appointments and executive orders to promote much lighter enforcement of existing regulations.
Beyond that, the likely path of policy remains very uncertain. … It seems as though economists and investors have set aside these concerns as too hard to handicap.
We think this is a mistake. Until there is more clarity on policy we will remain in a very cautious mood. In particular, we think economic activity could slow and confidence could fade as consumers, investors and firms try to figure out whether they are net winners or losers from all of the policy changes.