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Why Trump Likely Does Less Than You Fear or Cheer

Investors may be better off watching what politicians do, not what they say.

Our political analysis is intended to be nonpartisan—we favor neither party nor any candidate and believe favoritism introduces the risk of bias—blinding in investing. We assess politics solely for how developments may impact markets and encourage investors to do the same.

If you follow financial media, you can be forgiven for thinking the investment world revolves around the White House the same way the solar system revolves around the sun. No one really knows what President Trump will do, but everyone has opinions. Speculation based on campaign promises, policy ideas, executive actions and tweets is rampant. With Republicans controlling both chambers of Congress and the White House, many presume Trump’s ideas will sail through into law. Or, if not, that he will just enact them by executive fiat. But whether that notion makes you fearful or cheerful, we’d suggest taking a step back: Presidents have little power to act unilaterally, and despite his party controlling Congress, Trump seems likely to face great difficulty passing many laws.

On the trail, President Trump campaigned on repealing several major pieces of legislation—the Affordable Care Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and longstanding laws restricting the government’s ability to negotiate drug prices. He stumped on altering trade agreements, enacting fiscal stimulus and changing tax policy. Most of those require Congress’s cooperation. As President Ronald Reagan once said, even very popular politicians get only one or two major things done. Trump will likely have to focus, which could mean setting some promises aside. But also, his support isn’t solid. The Republican Senate lead is slim—52 to 48. Democrats will be able to filibuster legislation. Additionally, Republicans aren’t a uniform bloc. There are deficit hawks who may oppose spending plans; free traders who oppose his protectionist talk; and especially, the 11 Republican “#NeverTrump” Senators who refused to endorse him. Just three NeverTrumpers voting with Democrats will shoot down a bill. Getting big bills through seems much more difficult than people think.

Consider the Affordable Care Act. Republicans near universally want to repeal it, but how varies dramatically. Several Republican Governors like Ohio’s John Kasich and New Mexico’s Susana Martinez are pressuring Congress to delay repeal until an immediate replacement plan is ready. Other Republican pols want to repeal now, replacement or no. Still others want to preserve aspects of the law while striking others. Trump initially wanted a full repeal, but later a partial one. Whatever happens, the differences hint at deep intraparty divisions. Dodd-Frank is another example. While Trump issued an Executive Order on February 3 ostensibly targeting Dodd-Frank, there is little he can do here without Congress. While many politicians want to reform aspects of the law, there is disagreement over which provisions.

Most Trump policies require Congressional approval. This includes fiscal stimulus, tax reform, taxing companies that transfer US jobs overseas, and capping or negotiating drug prices. Executive orders are a way to act without Congress, but the scope is limited and mostly reinterprets existing law. Such issues usually don’t approach anything big enough to materially affect stocks. For example, most of President Obama’s executive actions fit one of two categories: Sociology that doesn’t impact markets much—like his immigration actions. Or measures too small to help or harm the broad economy and stocks, like raising the Federal minimum wage. Whatever you think of the merits of these moves, for stocks, they were nonfactors.

Trade is an exception, as Congress has ceded a lot of authority to the president. But how and whether Trump’s rhetoric becomes reality remains to be seen. So far all he has done is use an Executive Order to pull the US from the Trans-Pacific Partnership, a free-trade bloc that wasn’t even final yet—and, frankly, was DOA regardless of who won the election. President Trump threatened China with tariffs and proposed renegotiating the North American Free Trade Agreement (NAFTA) or withdraw from it. We aren’t fans of tariffs because they hamper the free flow of global commerce, but a single tax needn’t start a trade war or derail the bull market. Targeted tariffs were used by many presidents—including Richard Nixon, Reagan, George W. Bush and Obama. President Obama’s recent tariffs on select Chinese steel products and solar panels didn’t trigger a trade war. Additionally, the scope here is debatable. Many typical pro-Republican groups oppose broad tariffs, which Trump has threatened. As for NAFTA, renegotiating could mean many things, some quite benign. Trump’s withdrawal threat could be a head fake, particularly considering Trump got a lot of support from areas like Texas that benefit massively from NAFTA.

What’s more, if you listen to Trump’s words, you’ll find he isn’t wholly anti-trade. He’s against multilateral trade deals, or in his vernacular, “bad deals.” He prefers bilateral deals, which he says are easier to enforce. Already, there is talk of bilateral deals with the UK and Japan, and many think NAFTA may evolve into multiple bilateral deals. If so, all the protectionist fear would be much ado about very little.

Outside trade, executive actions tend to be either too narrow to impact markets or are largely sociology. In the first two weeks of his presidency, Trump has issued a litany of orders and presidential memoranda—some stirring big emotions from the public, like his order restricting refugee access and immigration from seven countries in the Middle East. There is undoubtedly a big impact on certain families and individuals, but this largely misses markets. The table at the bottom of this article summarizes his first two weeks, as sourced from the White House. We left out things like proclaiming February “American Heart Month,” as it seems unlikely investors fear that much.

Now, some might say, “Well, isn’t it bad if the government can’t get anything done?” Not for markets. Stocks generally react favorably to a less active government. Legislation—especially broad, sweeping legislation—creates uncertainty. Who benefits? Who’s disadvantaged? It takes time for investors to work through those issues. By contrast, when the status quo prevails, investors have more certainty.

Trump is entering office as unloved as any president in generations. He lost the popular vote and polls show his initial approval rating is the lowest on record. Democratic investors fear him terribly, as do foreign investors. While some Republicans are big fans, other GOP investors mostly hope for the best while fearing the worst. For now, our advice is to watch what politicians do, not what they say. We expect less action than promised. Given the fearful backdrop, that should relieve investors and help send stocks on to a great year.

Table of Trump’s Two Weeks

Source: The White House, as of 2/3/2017.

By Todd Bliman, Fisher Investments

This constitutes the views, opinions and commentary of the author as of February 2017 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.

AT&T, T-Mobile and Verizon should be turning the volume up. Their current quiet murmur is just not enough.