Investors in U.S. stocks, which start this week at their highest prices ever, should watch President Trump's first speech to Congress Tuesday -- not for "specific policy proposals" -- but because it's "important politically:" Trump must "reach out to lawmakers in both parties" to get his agenda passed, stock analysts Brian Gardner and Michael Michaud tell clients in a report today for Keefe, Bruyette & Woods, the Wall Street investment house.
"Tuesday's speech will be an important oportunity for the President to reach out to political opponents," the KBW gang added. "If he strikes the right message, we think the markets could rally on renewed optimism of the administration's ability to achieve the pro-growth portions of its agenda" -- tax, trade and medical-costs reform.
And if the President makes a combative, self-referential campaign speech, doing nothing to pull in skeptics right or left, Trump risks turning off investors and stranding his agenda to "Make America Great Again."
To be sure, some stock-watchers say it's past time for Trump to fill in the blanks on his sweeping promises. The President "needs to get specific, because this market has risen on expectations that have failed to crystallize," warns Tom Siomades, head of the Investment Consulting Group at Hartford Funds, a $78 billion asset management firm based in Radnor.
"This is a market that's pretty impatient and wants results," Quincy Krosby, a market strategist at $1.3 trillion-asset Prudential Financial Inc. told Bloomberg LP here. “We need to see some details within all the policy talk,” added Sean Simko, who manages $8 billion in bond investments for SEI Investments Co., Oaks, Montgomery County. Without details, traders will lose confidence in the Trump rally, Simko predicted.
There's a large but bridge-able distance between Trump's tax reform promises and the cuts (and increases) proposed by House leader Paul Ryan and his lieutenants, writes a TD Bank team headed by senior economist James Marple.
House leaders and Trump want to simplify taxes, reducing payments especially for the rich who pay more of their income as taxes, and for big companies with billions of untaxed profits stashed in foreign accounts. Trump has called for deeper tax rate cuts than Ryan -- though Trump has also said he'll call for higher rates on "carried interest" payments to private-equity and some real-estate investors.
Will companies that pay lower taxes use the cash to create jobs? Don't expect that from Apple, Microsoft, Google, J&J, Pfizer, Coca-Cola, Ford, or other giants with piles of foreign cash, writes Andrew Chang, primary credit analyst at S&P Global Ratings, and his team, in a separate report.
Instead, companies that collect billion-dollar tax reductions will likely do what they did in 2004 and previous tax-cut years: They'll some of the cash to buy back their shares and force stock prices higher; give more to their bankers, to pay down loans, and to shareholders, as dividends; and buy other companies in expensive mergers, driving their own credit rating down, and borrowing costs higher, Chang added.
"For capital expenditures and research and development, we expect no meaningful changes" from big corporate tax cuts, Chang concluded.
The GOP tax-cut plan, reducing taxes on wages, salaries and investment and likely adding taxes on imported resources and other consumption, would help manufacturers that buy and build American, while hurting U.S. retailers, oil refiners, electronics and auto companies, and other importers and consumers used to cheap foreign goods, TD's Marple predicted.
Compared to Ryan's plans, which could be "revenue neutral" with relatively modest cuts to other Federal spending, Trump's tax cuts would cost the government a lot more -- at a time when he wants to boost military spending and has yet to identify cuts in other major programs.
Trump and Treasury Secretary Steve Mnuchin are expected to make their plans look more balanced by projecting that lower taxes on companies, investors and rich people generally will result in much faster business formation and expansion -- boosting the annual U.S. growth rate above 3%.
But "achieving greater than 3% growth on a sustainable basis will be a tall order for the American economy," Marple warns.
"This is largely due to demographics:" after decades of American families raising fewer children, the U.S. labor force is growing just 0.5% a year, down from its past average of 1.5% a year -- and that's counting "current rates of immigration," from all sources, which Trump plans to reduce.
The only way the economy can grow faster with fewer workers applying for jobs is with much higher reliance on robots and other productivity gains, the bank warns: "It is not plausible to expect such a rapid reversal in the absence of rapid technological change," TD's Marple wrote.
And that's assuming no big increase in construction projects or factory job demand -- both of which Trump has promised. Add that up and Trump policies could lead to a labor shortage, and the threat of higher prices.
Of course major change will be disruptive, in the short term. "Tax reform that shifts the burden of taxation from invest(ors) to consum(ers) should, over time, lift the level of investment," reducing demand for labor as machines take over, TD acknowledges. "Most of the anticipated gains from the GOP plan come through this channel."
It's also possible that lower tax rates could convince some people who don't currently have to work that they should go back into the workforce, though not many, the report adds.
"The bottom line is that tax reform is easier said than done," Marple concludes. "Tax cuts are easy, but expensive." Expense cuts -- most of the U.S. budget is Medicare, Medicaid, Social Security, military, debt interest -- are harder. And any taxpayers who stand to lose their loopholes "will lobby Congress against reform." Given all the obstacles, maybe changes will pass by "mid-2018," if Trump works to broaden his support, TD's Marple concludes.
Factory revival? Trump was at his positive best during his meeting with 24 manufacturing CEOs last week, according to the report of Dow Chemical Co. boss Andrew Liveris, who was there.
Trump showed his "relentless focus on revitalizing the American manufacturing sector and job creation for American workers," Liveris said in a statement his office sent me.
Liveris, who plans to step down after his company mergers with DuPont later this year, spent more of his brief statement listing what CEOs want than what Trump may have promised.
The bosses want "near-term actionable policy ideas centered on smart regulations, competitive taxes, and fair trade rules that support the President’s focus and desire to grow America’s manufacturing economy," according to the Dow boss.
They also want government help in finding and prepping workers to meet "our severe shortage of skilled talent," with public support for "education and training programs are aligned to the critical manufacturing technology and skills required for manufacturing careers of the future.” To prevent that looming skilled-labor crunch.