A One-Year Look at President Trump’s Economic Policies
This special report from J.P. Morgan’s Global Research Department, which can also be found on J.P. Morgan Markets, provides an analysis on U.S. President Donald Trump’s policy initiatives and proposals one year after taking office.
January 12, 2018
One year after the U.S. elections that brought Donald Trump into office, Congress has passed comprehensive tax reform, which is making history for the size of the corporate tax cuts that bring statutory rates to their lowest level since the pre-war years. Apart from tax reform, there have been few legislative changes and other policy priorities with varying degrees of success. President Trump’s stance specifically on trade has not resulted in material, concrete actions to restrict it. Emerging Markets ended the year as the top performers across equities and fixed income as the post-election surge in the U.S. dollar has more than fully reversed despite Trump’s “America first” strategy, with the J.P. Morgan U.S. Dollar Index marking its first down year since 2012.
With the passage of tax reform, there is renewed debate on whether fiscal stimulus reflation forces that markets had anticipated in 2017 could play out over the next year. J.P. Morgan’s Global Research team believes that tax reform translates into a modest boost (0.3%-pts) to U.S. growth for 2018, but it means more for equity market returns as tax cuts are positive for equities, while the reduction in interest expense deductibility is a negative for credit.
In 2018, U.S. growth should remain comfortably above our 1.4% potential growth estimate, while the unemployment rate should continue its descent to 3.7% by the end of 2018. The Fed, under the expected new Chair Jerome Powell, is unlikely to wait to see high inflation before acting, and we believe that they will continue to deliver a hike per quarter next year to bring the Fed funds rate closer to a neutral setting, given the solid trend in employment growth and a tighter labor market.
While it remains J.P. Morgan Global Research’s view that 2018 will not be the year of the “Trumpflation” trade, we expect an uptick in near-term volatility, rather than a shift in medium-term trends. Trade policy changes with material economic impact remain unlikely, but the dialogue around U.S. bilateral trade relationships with every major country, including China, has been reshaped in less than a year, and downside risks linger with markets focused on the North American Free Trade Agreement (NAFTA) renegotiation. In addition, the ongoing special counsel investigation headed by Robert Mueller will likely remain a source of recurring, but random, market stress because it can occupy time and resources from an otherwise transformative policy agenda.
We forecast U.S. growth at 2.3% year-on-year in 2018, which is about 1%-pts above our estimate of sustainable-trend growth. If our forecast is realized, the expansion will enter its tenth year in the second half of 2018 and will become the second longest U.S. expansion on record.
The legislation targets a $1.5 trillion increase in total deficits over the next ten years and includes roughly $500 billion that we would chalk up to the continuation of existing policies (notably in the form of “bonus” depreciation deductions and other “tax extenders”), with the top corporate tax rate coming down from 35% to 21%. With annual U.S. GDP of about $20 trillion, a $100 billion tax cut represents 0.5% of GDP. We see a modest boost to 2018 U.S. GDP growth of only 0.3%-pts given companies’ limited propensity to invest when they are not particularly cash-constrained.
The Senate Banking Committee recently approved the nomination of Jerome Powell to be the next Fed Chair; he is expected to be confirmed by the full Senate before Janet Yellen’s term expires in February. Though Randy Quarles filled a governor’s seat at the Fed, there are still three other vacancies on the board, which leaves the White House the ability to potentially reshape the Fed for many years to come. We forecast the Fed will hike rates four times during 2018, based on diminishing slack, rather than overheating risk from fiscal stimulus. Modest stimulus from tax reform shouldn’t lift inflation beyond the baseline rise to 1.8% on core personal consumption expenditures next year.
Since the presidential election, there have been no trade policy changes with material economic impacts, but trade has been continually monitored as a source of downside risk. One year into the administration, there has not been any material concrete actions to restrict trade. In the fourth round of NAFTA negotiations, U.S. negotiators made aggressive demands for new requirements in auto trade, changes to the dispute resolution mechanism and government procurement rules, and a five-year sunset clause for the entire agreement. The next round of NAFTA negotiations resumes in mid-January, with the final round scheduled before the end of 1Q18.
While it is possible that a new NAFTA will be negotiated in 1H18, there is still a significant risk that the agreement is terminated or replaced with a new version that negatively impacts trade.
There has been a rise in geopolitical tensions between U.S and North Korea, Iran and Venezuela, with increased sanctions being placed on all three countries. Although these sanctions have had little impact on the first two countries thus far, we expect Venezuela’s oil production to be impacted in the future.
Brent is up by nearly 50% since President Trump’s election on November 7, 2016. However, oil prices have relied more on the strengthening fundamental outlook for the oil market than on U.S. policy developments. While many of the choices made by President Trump since the election should have a bearing on prices in the coming quarters, the more important choice was made last November by the Organization of the Petroleum Exporting Countries (OPEC) to shift output policy in support of prices. The nine month extension of the current OPEC-NOPEC deal should support prices into a higher range in 2018 (mid-$50s to mid-$60s). We expect Brent to average $60/bbl and WTI to average $54.9/bbl in 2018 to factor in the commitment on the inclusion of Libya and Nigeria in the revised OPEC.
Of President Trump’s campaign promises, the likely ramp-up in protectionist trade measures and a potential increase in fiscal stimulus would likely have the greatest effect on base metals. However, new policies from the Trump administration had even less of an impact on base metal prices than expected, as both trade policy and stimulus measures had been stalled behind other legislative priorities such as health care and tax reform. Gold has traded in a range between $1,200/oz and $1,350/oz for the past nine months. The largest driver for gold in the near term likely will be Fed repricing U.S. real rates, which should push prices lower. While trade protectionism would likely be bearish for pricing and stimulus would likely boost prices, the fundamental base metals impact by any sort of boost in infrastructure spending would likely be prolonged and not extremely influential to the global demand for industrial metals.
The market would be more focused on:
After Trump took office, our U.S. equity strategists had a positive view on Growth and Momentum Styles, arguing that a maturing business cycle favors Growth over Value. Growth outperformed Value by ~14% in 2017. We view U.S. tax reform as the most significant upside catalyst for equities and have raised our end-2018 baseline S&P 500 projection to 3,000. We now advocate fully rotating into Value from Growth as Value companies should see the greatest EPS benefit from tax reform given that it has the highest domestic revenue at 76.9% (of total revenue) and carries the highest effective tax rate of 30.3% relative to other styles.
We recommend Overweight positions on reflation-sensitive domestic sectors such as Financials, Energy and Materials and Industrials. We have downgraded Growth stocks and are now Underweight multi-nationals such as Technology and bond-proxy pass-through sectors such as Staples, Utilities, and REITs, while moving Healthcare to Neutral. Recent U.S. macro data reflect a more favorable backdrop for Value with prospects for reaccelerating growth into 2018.
Our EM Equity research team sees EM equities delivering double-digit appreciation in 2018 (USD+12% upside), driven by earnings growth and modest room for multiple expansion. EM equities ended 2017 as the top-performing asset class returning a total of 34%, although the Trump administration will remain a source of volatility and potential downside risk related to trade policy into the new year. The pro-growth agenda is positive for global equities, particularly U.S. equities, and supported by the passage of favorable tax reform, deregulation and fiscal spending. However, the negative risk to EM equities is slower economic growth led by possible restrictive trade policies, e.g. NAFTA at the forefront and targeted sanctions. Restrictive trade policies could have a long-term unintended negative impact on global growth and bias EM national elections toward nationalist behavior and disaffection with conventional policies, which could impact continued EM equities outperformance.
FIXED INCOME VIEWS
We believe that the Fed will march forward on rate normalization. We project the Fed to raise rates by 25bps at each of the four long-form meetings in 2018, leaving the Fed funds target range at 2.25-2.50% by the end of next year. In addition, we expect the Fed’s balance sheet to shrink by nearly $400 billion, 9% from its size at the end of 2017. In contrast to 2017, the Federal Open Market Committee may actually deliver on the number of hikes it has projected for 2018.
The continued rise in yields has been driven by:
Both High Grade and High Yield spreads have rallied on the U.S. strong growth trend and the expectation of pro-business tax policy and regulatory initiatives to come. One surprise in 2017 was a slowdown in M&A activity, which has been attributed to the uncertainty on tax policy and on healthcare reform. M&A picked up again with tax reform moving forward, and we expect increased M&A to be a theme in 2018. There is some regulatory uncertainty on this, however, with the unexpected challenge by the Department of Justice to a large merger in the Telecom/Media space. In terms of trade, NAFTA negotiations will remain on the radar for some corporate bond issuers, particularly in the Automobile Manufacturing and Agriculture sectors.
With the passage of tax reform, we believe it will likely have more impact on bond supply than on corporate creditworthiness for the High Grade bond market. An important aspect of the U.S. tax bill impacting High Grade bond issuers is the cash repatriation provisions which, in our view, will likely:
Another important aspect is the limit on the deductibility of interest expense by corporates. High Grade companies are unlikely to be impacted, but some High Yield issuers will be impacted by the limit on the deductibility of interest expense at 30% of EBITDA (for 2018-2021), and then by the exclusion of depreciation and amortization (EBIT) from the calculation in future years. The limitations on interest deductibility are an issue for the most stressed CCC-rated issuers. Meanwhile, there are several credit positive elements in the tax bill, which include a reduction in the corporate tax rate to 21% (from 35%) and the ability to fully deduct capex in the year spent for the next six years.
The post-election surge in the U.S. dollar more than fully reversed as it had fallen by 7.1% in 2017, marking the first down year since 2012. We expect U.S. dollar strength in the first half of the year as the Fed proves the only major central bank adjusting policy. In the second half of the year, U.S. dollar weakness could play out as policy normalization elsewhere comes into focus through European Central Bank balance normalization and a possible hike in the Bank of Japan yield target.
A variety of idiosyncratic risks could continue to drive the dollar, but we point out that one year into the Trump administration, the president’s policy initiatives are producing more noise than impact, and thus, more near-term volatility than medium-term trend. Washington’s policies are more risks to the baseline forecast, with potential surprises from tax reform implementation and various other issues including trade policy, the ongoing special counsel investigation headed by Robert Mueller and fiscal risks.
back to top
RECENTLY PUBLISHED RESEARCH
All links will require client access. For all inquiries, please reach out to your J.P. Morgan representative.
Tax reform clears another hurdle: Where passage does and doesn't influence the 2018 view
John Normand, Dec 4, 2017
The J.P. Morgan View: Squinting to find signs of stress
John Normand and team, Dec 1, 2017
The J.P. Morgan View: How much tax reform is priced?
John Normand and team, Nov 17, 2017
Global Data Watch: Boom shaka-laka-laka
Bruce Kasman and team, Dec 1, 2017
Daily Economic Briefing: US closing in on tax overhaul
David Hensley and team, Dec 4, 2017
US Outlook 2018: Eat, drink, and be merry, for in 2019...
Michael Feroli and team, Nov 28, 2017
2018 Global Commodities Outlook: The most interesting opportunities will be tactical
John Normand and team, Nov 21, 2017
Oil Market Weekly: Raising 2018 price forecasts to $60 on Brent and $54.9 on WTI
Abhishek Deshpande and David Martin, Dec 8, 2017
Oil Market Outlook: OPEC agreement and robust demand growth support 2018 price forecasts
Abhishek Deshpande and David Martin, Dec 4, 2017
Oil Market Weekly: OPEC forges a further nine month deal
Abhishek Deshpande and David Martin, Nov 30, 2017
Metals Weekly: What are the potential US tax reform implications for metals markets?
Natasha Kaneva and Gregory Shearer, Dec 6, 2017
European Oil Field Services: 2018 Outlook: Out with the old, in with the new cycle projects drive negative risk/reward. Top picks WG, PFC, d/g TRE, LAM to N
James Thompson and team, Nov 30, 2017
Equity Strategy research
Global Equity Derivatives: 2018 Outlook and Trade Ideas
Marko Kolanovic and team, Dec 14, 2017
US Equity Strategy: Tax Reform Gains Momentum, Expect Further Equity Upside and Rotation from Growth into Value
Dubravko Lakos-Bujas and team, Dec 4, 2017
S&P 500 Opportunistic Strategies: Top Tax Outperformers for Upside Call Buying
Shawn Quigg and team, Nov 27, 2017
Market and Volatility Commentary: Tax Reform S&P 500 Upside, Positioning and Exuberance, Volatility and GDP
Marko Kolanovic and team, Nov 22, 2017
European Equities Research
European Utilities: US Tax Reform: A mixed bag for European utilities
Christopher Laybutt and team, Dec 5, 2017
Tobacco & Food Ingredients: Implications of US tax reform. Biggest upside in PM and BAT
Alberto Lopez Rueda and team, Dec 4, 2017
US Equities research
US Tax Reform: Tax Reform to Drive Equity Upside and Continued Rotation
Nicholas Rosato Jr. and Dubravko Lakos-Bujas, Dec 20, 2017
US Year Ahead 2018: Stocks for Every Strategy
Nicholas Rosato Jr. and team, Dec 1, 2017
Realogy Holdings Corp.: A Cloudy Outlook; Reducing Estimates and a look at Tax Reform
Anthony Paolone and team, Dec 6, 2017
Department Stores & Specialty Softlines: Digging Deeper: 3 Areas of Tax Reform Focus; Sensitivity Analysis
Matthew R. Boss and team, Dec 5, 2017
Utilities & Power: Tax Reform a Mild Negative for Regulated Utilities; Mixed For Less Regulated Names with Some Notable Positives
Christopher Turnure and team, Dec 4, 2017
Food Producers and Retailers: Updated Impact of GOP Tax Plan on Each Company Under Coverage. Biggest Potential Beneficiaries: DAR, TWNK, DF, BUFF, KR
Ken Goldman and team, Dec 1, 2017
Hardlines/Broadlines Retailing: ~21% Average Profit Boost from Proposed Corporate Tax Rate
Christopher Horvers and team, Nov 29, 2017
Corporate tax cuts and FX: History indicates risks of larger US capital inflows
Meera Chandan, Jan 9, 2018
US Fixed Income Research
US Fixed Income Markets 2018 Outlook
Matthew Jozoff, Alex Roever and team, Nov 22, 2017
Alex Roever, Phoebe White, Teresa Ho, and Kaustub Samant, Nov 22, 2017
The impact of tax reform on the housing market: An update
John J Sim Jr., Alberto Iglesias, Kaustub S. Samant, and Christiana Wong, Dec 20, 2017
Global Credit Research
Defining the Contours of the 2018 Outlook: Six things to think about for global credit markets
Stephen Dulake and team, Dec 20, 2017
US High Grade Credit Research
Year-End Thoughts on Tax Reform, Foreign Demand and Spreads: For the US HG corporate bond market
Eric Beinstein and team, Dec 19, 2017
US High Yield Credit Research
US Tax Reform and the Implications for the High Yield Market: High Yield and Leveraged Loan Research
Peter Acciavatti and team, Dec 20, 2017
HY Homebuilding: Does Anyone Else Find This Taxing? Implications of House/Senate Tax Reform Proposals on the Builders
Arjun Chandar and team, Nov 16, 2017
The J.P. Morgan View: How much tax reform is priced?
John Normand, Nov 17, 2017
A senior analyst involved in the preparation of the content of this report has a household member who is a senior portfolio manager of and investor in certain emerging markets mutual funds, which may invest in instruments discussed in this report.
This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures.
JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.
This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan.
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing email@example.com with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail firstname.lastname@example.org. All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, emailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative.
Confidentiality and Security Notice: This transmission may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable law. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution, or use of the information contained herein (including any reliance thereon) is STRICTLY PROHIBITED. Although this transmission and any attachments are believed to be free of any virus or other defect that might affect any computer system into which it is received and opened, it is the responsibility of the recipient to ensure that it is virus free and no responsibility is accepted by JPMorgan Chase & Co., its subsidiaries and affiliates, as applicable, for any loss or damage arising in any way from its use. If you received this transmission in error, please immediately contact the sender and destroy the material in its entirety, whether in electronic or hard copy format.