Legislative roadblocks to President Trump’s tax reform plans could bring US economic expansion
— and long-running Wall Street gains — to a shuddering halt, writes Kryan Fitzgerald.
There are a lot of large happy porkers and wolves gathered round the Wall Street trough, but will the pigs and the wolves be able to go on filling their ample bellies to their hearts’ content?
The talk on the US business shows is about how we are in “the greatest bull market of all time”.
But, is this just the last stage of euphoria before another meltdown?
Back in March, analysts considered the extraordinary surge in the benchmark Standard & Poors Index, the main gauge of US large cap equity stocks. At the time, investors were celebrating the eighth anniversary of a stock value surge that had taken off in spring 2009 when advanced western economies were on their knees. During those years, the Index surged in value by 250%.
We were enjoying the ‘Trump bump’ as investors prepared for a happy era of tax cuts for the well-off and financial deregulation. Since President Trump’s victory, almost a year ago, the value of stocks on the Index have jumped by $3.5 trillion to almost $23bn.
There is now plenty of expectation of a shareholder-friendly fiscal overhaul built into the pie.
The mood music is being assisted by a global recovery that is helping people to accentuate the positive despite ongoing concerns about huge imbalances and indebtedness across the world, and a rise in populist political pressures.
Back in February 2016, the new president proudly tweeted: “Stock markets hit new high with longest winning streak in decades. Greatest level of confidence and optimism — even before the tax plan rollout.”
Donald Trump knows that he must be seen to shower his support base with money and what better way to do that than via a long stocks boom?
In terms of sheer length and extent, the current bull run is outmatched by just one: the great tech stock surge between October 1990 and March 2000, which helped boost investment into the Irish economy. This lasted 113 months and produced a rise in the S&P of 417%.
At the time, a leading sceptic, Professor Robert J Shiller of Yale University suggested that it was time to consider reducing equity holdings. His fundamental argument is that price earnings ratios were at unsustainable levels.
Mr Shiller, himself, is the creator of a measurement of P/E ratios which sets out to take account of distortions created by the operation of the economic cycle.
Put simply, he takes account of the fact that during periods of economic expansion, companies tend to enjoy higher profit margins and earnings. The opposite is the case during recessionary periods.
While conventional US P/E ratios have experienced a sharp rise to levels considered challenging, at well over twenty times earnings, the Shiller ratio is now at over 31 times earnings. This, say bearish analysts, is at a level over 85% higher than the historical mean.
The US economic expansion has now lasted 100 months. Just two other periods of American expansion, the technology-led expansion between March 1991 and March 2001 — 120 months long — and that between February 1961 and December 1969 have lasted longer than this.Much depends on just how sustainable the US economic recovery turns out to be.
What is remarkable is that the current growth phase — like Old Man River — just keeps on rolling along. Since the middle of February, when Mr Shiller issued his warning and President Trump dispatched his upbeat tweet, the S&P has pushed up from around 2,350 points to over 2,650.
This has happened despite the long delay in the introduction of the Trump tax reforms — the prospect of which has served to fuel the rise in the first place. The markets have ignored political events, including the rising prospect of nuclear conflict in East Asia.
But amid the bullishness, there is a note of nervousness. Treasury Secretary, Steve Mnuchin, an old Wall Street hand, last week warned that if the legislators did not sign up to his boss’ tax reform proposals, “you are going to see a reversal of a significant amount of these gains”.
At the same time, President Trump’s Republican predecessor, George W Bush was aiming both barrels at his president in his blunt condemnation of those who peddle the politics of
division. A reminder of this is that Mr Trump’s enemies within the Republican party are ready to strike.
The Trump people will be setting out to pressure Republicans and Democrats alike into backing the ‘reform’ plan which many, in truth, find hard to stomach given its pro-wealth bias and the likely impact on the deficit.
Victory on the Hill could give this share price boom a last lap of honour, but if we get legislative gridlock, then watch this space.
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