What does that mean for US companies? (and we care because the All Country World Index, the global equity index upon which we benchmark our equity performance, has 53% US companies in its composition).
It means increased costs (for labour and materials) and likely increased prices passed on for the sales of goods and services to cover those costs. The costs of US labour were the key to driving offshore out-sourcing to considerably cheaper labour markets in years past.
In short, the economic laws of comparative and competitive advantage, which have allowed US companies to grow profitability in years past, may be regulated against.
Higher costs and wages and higher prices have been the basis of what has become referred to as "reflation".
That is all well and good, as long as economic growth is driving it. Otherwise, it is called "stagflation".
From the text of President Trump's inaugural address:
(Trump Inaugural Address)
"Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength."
Protection (trade policy) does not lead to great prosperity (as has been proven throughout history) and growth, so it remains to be seen how great US economic growth will follow.
We are standing by, waiting on detail, although it is hoped for and expected that tax reform, tax reduction and deregulation (for those who comply) should help to offset additional costs to corporations and that infrastructure spending will also add to the economic growth mix:
"We will build new roads, and highways, and bridges, and airports, and tunnels, and railways all across our wonderful nation."
What is not clear however, is exactly what this will cost (reduced tax revenues and increased infrastructure spending) and who will pay for it all. Initially, it is anticipated that the US government will bear the brunt of this with sizable increases in deficit spending (funded by the issuance of more US government bonds).
What is hoped for is that increased economic growth will in turn eventually draw more tax revenues to help pay down the increases in debt levels, however it is hard to see that end result without any specific detail (especially if trade protectionist issues become severe). Deregulation in the early 2000's under then President Bush ended in a financial market crisis.
Another question comes to mind: how do you deregulate while at the same time try to regulate ("buy American and hire American")?
Cue in more uncertainty.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist