Economics Trumps Emotions
I have just come back from a few days in New York. Whilst there I spent an hour or two perusing some of their many bookstores and if I did not know better I would think that a number of people are not too happy with their choice of President!
Displays of books with titles such as “How Democracies Die”, “Trumpocracy: The Corruption of the American Republic”, “We Were Eight Years in Power: An American Tragedy” and of course “Fire and Fury: Inside the Trump White House” suggest there is a huge appetite for, and money to be made writing books on the last election.
I am currently reading the latter book and enjoyable it is too. I am sure that Trump haters will be poring over every chapter and using this to reinforce their existing viewpoint and their angst. Watching the Grammy awards it was clear that no Trump fans were amongst the multi-millionaires in the audience or on stage with every declaration against him being cheered to the rafters.
Of course Trump has never made any attempt to win over the media or the “elite” and doesn’t seem to be changing tack now. However, I wonder if this constant negative reporting is why a number of investors have missed out on the gains made by the US stock market? The headlines in the last year have focussed on the travails of the White House and have masked the real story which is one of genuine economic growth with signs that this is likely to accelerate in the coming year or two.
Take the tax cuts that were announced earlier this month. As well as cutting income taxes for virtually all Americans, the rate of Corporation Tax has also been slashed from 35% to 21%. In addition, a one-off moratorium allowing companies to repatriate cash to the US and only pay roughly 15% tax was announced.
Apple and Citigroup have already stated they will pay $38bn and $22bn respectively in one-off tax charges to allow them to move the cash they hold offshore back to the States. And with many more companies to make an announcement it is creating a tidy windfall for the US Treasury.
Now Trump opponents feel that these changes are only going to benefit the rich but is this necessarily the case?
It is early days but already we have seen Walmart (1.5m employees) announce an increase in their minimum wage from $10 to $11 an hour and they also plan to give each of their staff a $1000 bonus. This has been copied by over 280 (and counting) businesses with most giving bonuses of $1000 to $2500 and hefty wage increases. These include household names such as Home Depot, American Airlines, Apple, AT&T, Bank of America, FedEx, Pfizer and Walt Disney. The list is growing daily as pressure builds on others to do the same.
To the audience at the Grammy’s these amounts are no doubt piffling but to the ordinary worker in the US they represent quite a considerable boost and are unlikely to lessen Trump’s support in the heartlands. What’s more they will also be putting hundreds of billions of additional dollars into the economy.
Now the reason I mention this is UK retail investors reduced their exposure to the US in 2016 and as a result missed out on the returns in the market last year. Now they are net buyers of the US once more (probably a bit late to that particular party) and are piling out in droves from the UK as they have been doing since Brexit. (Source – Investment Management Association – Dec 2017)
I am in no doubt that leaving the EU is as popular as an audience with Trump amongst the chattering classes but who’s to say that, economically at least, they may end up wrong on both counts, and, if they are, investors should be wary of letting their heart overrule their head and run the risk of missing out on returns once again.