It is Time to Be Optimistic Again
Donald Trump’s plans for the economy will boost deficits, interest rates and growth but also will create opportunities for ordinary investors, it is time for Americans to be optimistic again.
Both Trump and Hillary Clinton promised sorely needed additional spending on roads and public structures, schools, railway stations and the like.
Thoughtful proposals have been put forward to pay for some of these projects with private funds—for example, encouraging private businesses to build toll roads—but most projects only deliver revenue to investors over many years and up front private borrowing will be needed.
Many projects simply can’t generate enough revenue directly through user fees to attract private capital, such as public facilities like parks and most mass transit, and those must be financed by new federal and state governments bonds.
Replacing Obamacare (ACA) with direct subsidies and tax credits to help low and middle income Americans purchase health care may instigate more competition among private insurance companies, but it won’t fundamentally lower prices for drugs, medical devices and the services offered by physicians, hospitals and the like. That would require implementing more far reaching reforms, such as the price controls imposed by the German government on its system of private insurance, and those are not likely to find much appeal in a Republican dominated congress.
In the end, providing relief from whopping increases in health insurance premiums for the millions of Americans who purchase individual policies on HealthCare.gov will require congress to allocate more money for subsidies—even if individuals are empowered to purchase insurance across state lines. Otherwise, they will face even higher deductibles, copays and limitations on coverage than Obamacare policies now impose. That will boost the federal deficit and require more borrowing.
Lowering corporate rates and slicing rates paid by small businesses who file individual federal and state tax returns can only be partially financed by closing loopholes and will increase the deficit.
Similarly, providing a childcare benefit to young families and broader individual tax relief will not be free.
Cutting taxes may boost growth—for example, a $100-B tax cut overall many increase GDP by $120-B, and that could generate as much as $30-B in new revenue, but it would still swell the deficit by $70-B.
The impacts of more spending on infrastructure, healthcare and tax relief could easily accelerate GDP growth by one percentage point but only at the expense of raising federal borrowing by hundreds of billions
Moreover, after years of austerity European governments were poised to increase deficits even before Donald Trump’s election. Now, nationalist movements on the continent are emboldened by his dramatic victory, and this will likely encourage sitting governments in France, Germany and elsewhere to placate voters with even more spending.
The West is headed for a mighty fiscal stimulus, and with high unemployment throughout most of southern Europe and many prime working age Americans standing on the sidelines, employment, wages and incomes will rise—a lot!
Globalists are apoplectic that Donald Trump’s promise to redefine trade with Mexico, China and others will wholly disrupt international commerce but look for cooler heads to prevail.
US manufacturing supply chains are too integrated with Mexican and Chinese facilities to be simply disrupted by huge new tariffs. Instead, Trump has options to leverage our trading partners to renegotiate existing agreements to reduce the US trade deficit. That would further increase the demand for what Americans make.
Some of this burst in borrowing and GDP will simply increase inflation but most will result in the production of more US-made goods and services. Either way, interest rates and corporate profits will rise.
The elderly will again be able to obtain decent interest rates from banks on their CD’s, and ordinary Americans can look forward to higher stock market returns in their retirement savings accounts.
Young adults through those in their 50’s should be investing in stocks most of what they won’t need over the next five years—for example for down payments on houses, to pay college costs and as a cushion against a personal emergency.
But, it is foolish to try to beat the market and pick the industries and companies that will benefit most from Donald Trump’s program.
Instead buy an S&P 500 Index Fund, which covers about 80% of US publicly traded equities, and perhaps allocate 20% to a similarly broad based international fund.
At retirement, folks should be 50% in cash, including money market deposits that are quickly converted to cash and only gradually invest in CDs as interest rates rise.
It is time to get optimistic again!
|NYSEArca:SPY||220.18||21 November 2016||1.68||219.17||220.18||219||56,725,507|
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Bullish (0.29)||Neutral (0.21)||Very Bullish (0.51)||Neutral (0.16)|
By Peter Morici, economist and business professor at the University of Maryland, and a national columnist
Paul Ebeling, Editor