Investors in U.S. equities have been buying stocks based on an assumption that the incoming administration will be “pro-business” (lower corporate taxes and less regulation). For the most part, investors are correct to assume that, as both cabinet and advisory appointments speak to that, most famously with several Goldman Sachs alumni and the head of Exxon Mobile. (Since the DJIA is price weighted, Goldman Sachs stock’s 35% rally since the election makes up a large portion of the DJIA move in that time period). Banking regulation, environmental and labor protections have been in the cross-hairs of Republicans business leaders for years now. Read some of the business optimism releases from the NFIB for example, before and after the election, to get a sense:
Small business optimism remained flat leading up to Election Day and then rocketed higher as business owners expected much better conditions under new leadership in Washington, according to a special edition of the monthly NFIB Index of Small Business Optimism, released today.
“What a difference a day makes,” said Juanita Duggan, President and CEO of the National Federation of Independent Business (NFIB). “Before Election Day small business owners’ optimism was flat, and after Election Day it soared.
But there’s another factor that could play out. And that’s that this particular Republican president ran on a quite different platform than the typical Paul Ryan Republican type. And he risks betraying much of his populist campaign rhetoric, especially with Wall Street deregulation and trade. It will be interesting to watch him try to navigate this dichotomy and we may see battles between the White House and Congress on issues like this (and things like the stimulus), even though they are the same party.
It’s and interesting moment for the economy. Remember that the current president inherited an economy that was on the precipice of collapse, and instituted policies (and continued prior administration ones like the auto-bailout) to save the very businesses who are now queuing up for the tax holidays and deregulation on tap now that they’re thriving.
Our taxpayers money saved our banking industry, a big chunk of the insurance industry, the auto industry and a few others. And as some old industries like banking faced heavy regulation in the wake of the bailouts, (remember, they tried to innovate and failed with complex financial instruments in the lead up to the financial crisis) but from the ashes of the crisis, tech startups, mostly from Silicon Valley, were massively disrupting existing industries. Think of Betterment, SoFi & Venmo in finance, Uber & Tesla for Autos, SpaceX filled the gap for NASA after funding cuts, Airbnb slid into a battered travel industry, Spotify into a devastated Music industry, WeWork for office leasing, Slack, SnapChat, Twitter etc etc. Not to mention the shear dominance since the crisis by Apple, Google, Facebook and Amazon. If you were to ask the founders, management and investors of most of the companies listed above, they would tell you that the U.S. has been a pretty peachy place to start and operate a business since the banking crisis.
One of the sleight of hands that may occur to straddle that populist/business friendly dichotomy is significant de-regulations and corporate tax cuts, alongside symbolic (and hyped by the media) battles with specific companies and countries. The President Elect has publicly criticized Boeing, Lockheed Martin and The New York Times since he has been elected, not to mention Apple and Amazon during the campaign. And the Carrier deal in Indiana that saved 800 jobs from being shipped to Mexico, which on the scale of Federal economic policy is barely noticeable, but it could prove to be a blueprint for future demands for tax breaks from U.S. manufacturers and cause a subsequent business unfriendly reaction to those deals.
Yesterday, GM shareholders got a little preview of an unfriendly reaction, when Chinese official announced they were slapping fines on an “un-named U.S. automaker” for monopolistic practices in the country. GM stock declined nearly 4%. The reason for the move? Payback for the Taiwan call:
The surprising report of an investigation of GM comes suspiciously close to President-elect Trump’s incendiary recent comments on Taiwan. Trump said that the U.S. could change its long-standing position that Taiwan is part of “one China,” which shocked the Chinese political scene. Along with Tibet and Tiananmen, Taiwan is one of the most sensitive issues in China, commonly referred to as the “three Ts.”
Following Trump’s remarks, China observers feared retribution, and said that GM would be the most inviting target.
This is really unprecedented stuff and needs to be in the back of the mind of all investors as the new tape bomb for a company you own shares in may come from the President’s personal Twitter account. Business leaders seem to recognize the new political environment and for now are willing to play nice as they likely feel they have a fiduciary responsibility to their shareholders. Yesterday, Silicon Valley leaders, many of whom were outspoken against the President elect in the run-up to the election, sat around the table with Trump, Pence, and others in the incoming administration (and oddly, the Trump kids).
Speaking at the meeting, the President elect said:
“Anything we can do to help this go along, and we’re going to be there for you,” “You’ll call my people, you’ll call me. It doesn’t make any difference. We have no formal chain of command around here.”
This is a group of people whose major concern up until now was how to get all the money they make overseas back here without getting taxed. But now they’re sitting around the table with someone who had been outwardly critical of them (in Tim Cook and Jeff Bezos’ case) and others who didn’t even make it to the table because they had already pissed people in the Trump campaign off (crazy if true, but Twitter was apparently, not invited because they refused to make a “Crooked Hillary” emoji during the campaign). But at the same time they’re around the table with someone (and his kids?) who is willing to take personal phone calls from business leaders at all hours of the day, while refusing to meet with others.
Investors are right to expect a business friendly environment in Washington. I also think it is safe to say that those tech leaders have not been too bothered by much of a regulatory environment over the last 8 years. I would also expect them to continue to out-perform the very industries they are disrupting regardless of who is in the White House. The President elect played nice because they need him far less than most other industries, and he knows it.