Change Is a Process So Be Patient

The premise for Trump’s rise to the Presidency was his desire to change the political direction of our country — “To Make America Great Again” and to put “America First”.

The key tenets of his populist agenda were cutting taxes, reducing regulations, implementing a trillion-dollar infrastructure program, promoting fair trade, repealing/replacing Obamacare, energy independence and cleaning the swamp.

Trump has a huge agenda. It may have to be scaled back to pass Congress. It is unfortunate that the disparate members of his own party, let alone the Democrats, too, can’t come together and negotiate deals that will benefit America first, rather than their own constituents. The underlying dynamic of his agenda is to revitalize America. A strong America is good for global growth, peace and prosperity. Ask Reagan.

Trump led off his agenda with repealing/replacing Obamacare. He hoped to gain back a trillion dollars in future tax costs from its repeal that would be used to reduce corporate and individual tax rates to well beneath 20% from an average of approximately 28% today. But healthcare legislation has proven to be a thorny issue to start with, delaying his real agenda to stimulate domestic growth.  He must set a time limit of possibly May 30th to reach an agreement on it. If not, Trump needs to put it in the drawer for another day so that tax legislation can be offered to Congress before summer recess and passed by mid-to late- fall allowing for significant business and personal tax cuts. The trillion-dollar infrastructure program will be right behind tax legislation.

Trump needs to focus on the domestic economy. It is time for him to walk the walk. It would be very difficult for Congress not to support any of these programs. Trump will gain so much political capital once his programs stimulate growth and boost job creation; therefore, it is not a hard decision to make. I have never doubted that these programs would be passed, but rather when. The market is growing impatient and corporations are just chomping on the bit to move aggressively forward once there is some certainty out of Washington on these programs. Just ask Jimmy Dimon, Chairman of Chase. Business is primed to go!

It is clear that there is a change in Trump’s inner circle with the centrists rising: Cohn, Kushner and his daughter, while the extremist/isolationist, Bannon and his supporters, falling in influence. It is equally obvious that the Business Round Table led by Steven Schwarzman is gaining more influence as evidenced by Trump’s support for the Export-Import Bank which he was once against. He also changed his view that China is a currency manipulator. Both are good pro-growth decisions.

It is a bit ironic that Trump appears to be working well with President Xi Jinping of China while distancing himself further from President Putin of Russia. Working with China to promote fair trade and neutralizing North Korea would be hugely beneficial to America, global growth and world peace. Trump also mentioned last week to expect something “great” out of the NAFTA negotiations. And we are close to working out a win/win deal with Japan. Again, all good!

Trump cannot win with the media and his political opponents, whether Republican or Democratic, no matter what he does. Even if they agree with the bombing of Syria, the Ex-Im Bank, that China is not a currency manipulator and bombing ISIS in Afghanistan, they say instead that he flip-flopped and broke campaign promises. Did you see the NY Times editorial yesterday? Rather than applauding his shifts in many of his views, which by the way are close to the view of the Time’s Editorial Board, they dismissed them as broken promises and flip-flopping. The media is clearly having a negative impact on sentiment and continues to present a bias rather than an objective point of view, which includes change in Trump’s agenda that they clearly support.

The simple truth is that change is a process and you need to be patient as it unfolds. I believe that Trump’s goals “To Make America Great Again” and “America First” are sincere.  He has shown openness to review all the facts, reflect and consider mindset shifts; and adjust his agenda/programs to garner sufficient support to pass Congress. I still expect a majority of his growth agenda to be passed this fall. It’s time to unleash the U.S. economy, so that growth accelerates which will benefit all Americans and the global economy too. We need action and certainty out of DC rather than partisan politics as usual. Have you seen the record low opinion polls of Congress? Time to “clean the swamp” indeed.

I am not concerned that the U.S. economy slowed in the first quarter from strong fourth quarter results. We have written many times that the U.S. economic growth has acted as an accordion for the last few years with a strong quarter followed by a relatively weak one and visa versa. There is no tangible reason why underlying growth will break out from its 2-2.5% pace until Trump’s growth agenda begins to move through Congress and is enacted.

The flip side is that inflationary pressures remain subdued and interest rates have fallen back below 2.4% boosting the stock market multiple. The surprise and missing piece needed for stock valuation is earnings and here remains the pleasant upside surprise. We continue to project accelerating earnings growth in first quarter results compared to 2016 due to stronger than anticipated global growth; volume expansion leading to margin improvement and continued strong controls over all costs. The bottom line is we see no reason to alter our stock market forecasts with a S&P 500 target price of 2400 for this year and higher again in 2018 as Trump’s agenda comes into play.

The investment implications are clear:

  1. Invest, don’t trade, as trading the all the daily economic and geopolitical news has a way of whipsawing you such that you will miss the underlying positive trends.
  2. Look through the windshield by anticipating that much of Trump’s pro-growth, pro-business agenda will be passed later this year.
  3. Review your core beliefs as these changes start to unfold.
  4. Factor the geo-political and economic landscape into your investment process.
  5. Invest in best in class with the strongest managements whose companies will continue to thrive over the next few years regardless of the economic landscape and will also be clear beneficiaries of the Trump agenda and global reflation.
  6. Remain disciplined and remove emotion from the equation as best you can.

I realize how hard it is to step back and not react to the news hitting you throughout the day. It does not help that the media has a negative bias. But a successful investor must be patient and recognize that change is a process and won’t happen in a straight line without hiccups along the way. Remember, the trend is your friend. Trump has a pro-growth, pro-business agenda that will be passed in full or in part this year that will stimulate domestic growth for many years. It is equally clear that he is not a protectionist fighting for fair trade with tight oversight. What is wrong with any of this?

I am supportive that he is raising the stature of America on the world scene so that we are recognized once again as a reliable partner. Getting close to China has far more long-term benefits for America and our friends than getting tight with Russia. Ask the Japanese and our friends in the Pacific who are worried about North Korea what they now think about Trump. Ask our NATO partners if they are not reassured that America will stand with them against Russian aggression. Ask the Saudis and other Mid-East friends what they now think about America after the bombing of Syria and Afghanistan.

I realize that these are unsettling times but uncertainty creates opportunity. The economy clearly needs a shot in the arm from Trump’s pro-growth agenda; businesses and individuals need some certainty about tax, regulatory, trade and infrastructure programs before committing. Until this becomes more visible, the U.S. economy will plod along at 2-2.5% growth. Don’t discount that foreign growth is doing much better than projected even three months ago, which is having a positive impact on volume, pricing and profit gains here and abroad. The market is now undervalued with 10-year treasury bonds beneath 2.4%. Continue to buy the reflation beneficiaries including financials. Did you happen to see JP Morgan and Citicorp first quarter earnings last week? Pretty spectacular!

It is clear that geopolitical stress/tension in the Middle East and North Korea heightened since Trump bombed Syria, which is real, but it also helped solidify our relationship with many of our foreign counterparts including China. Trump is offering a better trade deal for China to intervene in North Korea, our biggest problem area, as I anticipated last week.

Let’s sum this up. Change is a process and takes time so you need to be patient. Trump’s shift to the middle of many domestic and foreign issues is positive as it reduces tension both here and abroad with our partners, including China but excluding Russia. If you look back just a short time ago, the biggest concern was that Trump was an isolationist and protectionist that could precipitate trade wars. What do you think now?

While the markets may be got slightly ahead of themselves anticipating that Trump’s domestic agenda would be passed quickly, we have had no such illusions. The key is Trump is committed to tax overhaul, less regulation, fair trade and a huge infrastructure program. And he has clearly moved to the center on many issues, which makes all of this more likely to become law this year. Look through that windshield as it is all on the horizon and will be supported by the public, businesses, politicians and our foreign partners. The question remains when, not if.

Stay the course and invest, don’t trade!

Remember to review all the facts; pause, reflect and consider mindset shifts; analyze and shift your asset allocation and risk controls as needed; do independent in-depth research on each idea and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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