• Tax and trade initiatives most critical
  • Lower recession risks, higher earnings, rising wages possible
  • Inflation impacts monetary policy and exchange rates

Tax reform, fiscal stimulus, and trade policy are key economic initiatives of the new administration. Among the proposals floated are significant reductions in corporate and personal tax rates, a one-time “tax holiday” for corporations that repatriate funds currently held offshore (an amount estimated at more than $2 trillion), and increased government spending on defense and infrastructure. Our newly elected president also has threatened to institute punitive tariffs on nations such as China that, in his view, engage in unfair trade practices. Of these potential measures, tax reform would likely have the largest financial impact, and trade the most risk, since other nations could retaliate by placing tariffs on U.S. exports.

If done well, a plan that carefully balances tax reform and fiscal stimulus can reduce recession risks, boost longer-term growth, and increase wages. However, the magnitude of the proposed measures can also influence inflation and monetary policy as well as the U.S. dollar. Tighter monetary policies and a stronger dollar may potentially offset some of the beneficial aspects of lower taxes and rising wages. Ultimately, we believe the mix of policy initiatives successfully enacted will be the dominant factor driving equity and fixed income returns for the next few years.

The chart shows the summation of monetary policy, fiscal policy, and the dollar exchange rate. The objective is to set policy just right, so that economic growth, corporate earnings, and wages increase, without excessive inflation. Currently, these economic components are rising and are at levels historically associated with good equity market returns. 


The tax proposals Mr. Trump initially articulated differ from the plan put forth by the House of Representatives. Mr. Trump wants to lower corporate and individual taxes substantially, which would reduce government revenues and increase the deficit, potentially by several trillion dollars. The House plan would lower taxes, but also reduce many deductions, broaden the number of individuals paying taxes, and try to be more deficit-neutral. How much Trump and Congress may compromise, and the resulting tax plan, is uncertain. If those devising new tax policies adhere to sound economic research, then tax changes should target areas that will drive productivity and capital formation, be implemented at timely periods as economic conditions warrant, and not add to the deficit on a sustained basis. It is not yet clear what the new tax regime will look like or when it will take effect. 

While global trade produces winners and losers, there are many economic arguments for sustaining trade among nations. A large negative impact is felt by those whose jobs have gone abroad, but technology and lower wages/costs overseas have roughly equal effects on eliminating domestic manufacturing jobs. Levying tariffs, which usually raises the overall costs of goods and services while reducing their quality and/or supply, can lead to retaliation by trading partners. The right path for policymakers is to sustain the benefits of global trade while minimizing the harmful effects of poorly designed trade agreements.

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Non-deposit investment products: are not FDIC-insured, are not Bank guaranteed and may lose value.

Index Definitions

The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.
The Real Monetary, Fiscal & Exchange Rate Policy Index is Real M2 Money Supply year-to-year change, plus Real Federal Expenditures (12-month total) year-to-year change, less Real Federal Receipts (12-month total) year-to-year change, less Real Broad Index of the foreign exchange value of the Dollar year-to-year change.

The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expectations of the economy to improve, expectations of real sales to move higher, current inventory, current job openings, expected credit conditions, whether now a good time to expand, and earnings trend.

The Citi Economic Surprise Index is a data series that measures how data releases have generally compared to economists’ prior expectations. When data is coming in weaker than expected, it declines; when data is coming in stronger than expected, it rises. This doesn’t necessarily mean that it declines when the economy is weakening, just when the data is surprising on the downside. The Index is a weighted historical standard deviation of data surprises.

The U.S. Treasury 10-year note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The BofA Merrill Lynch Fixed Income Indices track the performance of the global investment grade, high-yield and emerging debt markets.

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.