Our experts weigh in on the new administration’s potential fiscal policy and impact on the economy.
With a new Congress in session, confirmation proceedings underway for senior administration positions, and the Presidential inauguration in the headlines, a busy political season is underway. For investors, considerable uncertainty remains, despite Republican control of both houses of Congress and the White House. Which fiscal and regulatory policies will be priorities, and what effect could they have on the economy, companies, and earnings and other areas that are important to investors?
To help answer some of those questions, Viewpoints checked in with several Fidelity experts. They reminded investors that for most people with a well-thought out investment strategy and a diversified portfolio, there may be no need to take investment action based on a political transition. But for everything from taxes to regulation there will certainly be plenty of new information to digest.
Washington watch: Confirmations, budgets, and health care
Jim Febeo, Fidelity Public Affairs & Policy Group
Congress faces a packed legislative calendar during the first 100 days of the new administration. The first order of business will be Senate confirmation of cabinet secretaries and other senior-ranking political appointees.
On the policy front, President-elect Trump pledged to repeal and replace the Affordable Care Act (ACA) and Republicans have promised swift action on this policy priority. It’s important to recognize that the political and policy situation is fluid and changing, and the Republicans have not yet coalesced around a specific plan. So, the exact details may change.
Here is how I see things developing. The House and Senate are poised to use a fast-track budgeting process that would allow them to repeal major portions of the law. They are currently working on the details of a replacement plan, and the repeal would likely take place a few years in the future so that individuals do not lose their insurance while the new reforms are being implemented. The new plan is likely to retain several provisions of the existing health care law, such as protections for individuals with pre-existing conditions and health care coverage on a family plan for children up to the age of 26.
Another top priority for the early months of the new administration is regulatory reform. The Administration is expected to halt rules that are in progress and revise and delay what they can through Executive Orders and regulatory actions. At the same time, Republicans in Congress are hoping to advance legislation that would reform the regulatory process. They also will attempt to overturn some of the regulations that were enacted over the past few months, but it is unclear at this time which specific regulations will be targeted.
While uncertainty remains about the details of any changes, tax reform is likely to be debated and advanced in 2017. President-elect Trump unveiled a tax reform proposal during the campaign that has some similarities to the House Republican tax plan released last summer. Both proposals seek to reduce individual income tax rates, repeal the alternative minimum tax (AMT), and maintain a reduced tax rate for investment income. Both proposals would eliminate or cap many existing tax benefits, but would maintain a tax incentive for retirement savings, charitable giving and home ownership. Trump and House Republicans have proposed elimination of the estate tax, but the Trump proposal suggests that capital gains above a certain level may be taxed at death.
The economic view: Uncertainty abounds
Fidelity Asset Allocation Research Team
There remains tremendous uncertainty about how the complex array of potential policy actions will actually come to fruition in 2017—and what they will mean for the economy and investors. Here are three things to watch:
1. Big objectives, but many unanswered questions
Investor optimism about a boost to cyclical growth centers on the areas of alignment between President-elect Trump’s agenda and the traditionally business-friendly GOP Congress: tax cuts, corporate tax reform, and a lighter touch on business regulation. Faster economic growth could benefit companies which might see increased economic activity translate into higher earnings. On the other hand, more restrictive immigration policies could slow growth and spur inflation. In other areas, there is less agreement between the two sides. For example, President-elect Trump’s support for increased spending on infrastructure could spark both growth and inflation, while his anti-trade sentiments raise the risk of protectionist actions that could slow growth and lead to an uptick in inflation. (For more details on the outlook for growth and inflation, and the investment implications, read Viewpoints: “How to manage rising rates.”)
Putting it all together, it seems reasonable that some aspects of the growth agenda are likely to be implemented and could boost cyclical growth during 2017, but it’s also possible the impact might be partially offset if the policy mix is more negative for international trade than expected. Historically both fiscal stimulus and protectionist policies have tended to boost inflation, making an upside risk to prices perhaps the most likely outcome, regardless of the specific policy mix.
2. A maturing cycle and tightening Fed act as counterweights to stimulative policies.
Stimulative fiscal policies, such as tax cuts and infrastructure spending create a multiplier effect, which measures how one economic activity can lead to additional activities. Stimulative policy moves typically have the greatest multiplier effect at the beginning of an economic cycle when unemployment is higher and the economy has the potential to produce more. With the U.S. expansion more than seven years old and unemployment below 5%, a large stimulus could push the economy toward its capacity constraints quickly and give an upward boost to inflation. The Fed hiked interest rates in December 2016 for the second time this cycle even before any new stimulus, so a boost from fiscal policy could give the Fed confidence to normalize rates at a faster pace than expected.
3. Much of the global economy still has accommodative policies, but Europe has heightened political risk.
Outside the U.S., policy and political uncertainty is likely to remain high in 2017. After the emergence of antiestablishment views in the Brexit and U.S. presidential votes, national elections in France, Germany, and the Netherlands (and maybe Italy) will likely keep investors on edge. A clear victory by nationalist, populist parties in any of these areas could renew and intensify investor concerns about the economic and political unity of the eurozone. Meanwhile, the European and Japanese central banks face an environment where negative rates and additional monetary accommodation policies they have been using to attempt to stimulate economic growth appear to have hit the limits of usefulness, and are arguably doing more harm than good. At a high level, some major economies may be recognizing the limits of monetary easing and shifting toward easier fiscal stances, which would be an incrementally positive development for growth.
Fidelity asset allocation research team’s base-case outlook for public policy/politics in 2017:
- The probability of growth-friendly U.S. fiscal and regulatory policies has risen significantly with the Republican takeover of the White House and Congress.
- However, the distribution of outcomes is likely to be extremely wide, and the surest bet appears to be that most potential policy mixes point to higher inflation risk.
- Keep an eye on policymakers. In combination with election risk and monetary policy uncertainty in Europe, global policy direction is likely to profoundly influence the U.S. and global business cycles during 2017.
The markets: bullish for now
Jurrien Timmer, director of global macro
President-elect Trump has selected a number of pro-business people for cabinet positions. So the environment could be like the ’20s, or the ’80s, where it’s all about can-do animal-spirits. And that’s what the market is rallying on. I think many investors wanted a reason to be more optimistic, and they finally got one—at least in terms of the economy and growth.
I think there is going to be a window from the election until the spring where we’re not going to know how much growth will manifest. We may not know anything on the fiscal side until late spring or early summer. And generally speaking, that’s when the presidential cycle pattern has historically peaked out. The presidential cycle usually shows the first two years of the President’s term to be sub-average, and then the last two years to be above average. But the period from the actual election in November until the next April or May, tends to be pretty bullish, and then it flattens out. I think that’s kind of a natural timeline, when things may start hitting a wall. So, while I believe this bull market has room to run for a few months, I think most investors should stay focused on what comes after, when it may become much more of a two-way street. Unless you have strong convictions about near-term moves, the best bet is to stick with your long-term investment plan.
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