The Dividend Cafe - Trump's Tax Plan Takes Center Stage

Episode Date: April 28, 2017

Trump's Tax Plan Takes Center Stage by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, Chief Investment Officer at the Bonson Group, and we're happy to bring you our weekly thoughts and reflections on the market and all things investing. And it's certainly been an incredible week just like that. The bull was back. A ferocious 450-point two-day rally kicked off the week. It re-engaged investor appetite for risk, and it left many wondering if the good old days of February were back. The fiscal policy side of

the Trump administration's intentions are becoming a little clearer. France has its electoral matchup set. I say this a few times per year, but this is actually one of the Dividend Cafe editions I'm really happy with. I think there's a lot here worthy of consumption, so let's get into it. Never trust the smart guys. Financial markets often move in tandem with narratives, and narratives are more often than not a byproduct of media expectations. In other words, they're not usually very accurate. Unfortunately, most investors don't have a lot to go off of in formulating their expectations, fears, hopes, and general market framework besides the narratives that end up in their mind, generally from the media. One of my favorite weekly reads, Michael Gay at Pension Partners,

pointed out this week how the recent batch of narratives that have been baked in by the press have been, well, stunningly bad. Consider the following in order. If Trump is elected, markets and risk assets will tank. The result? Markets will not an unprecedented rally. Well, markets have rallied, but a new era of volatility can be expected. Result? Lowest volatility levels in over two decades.

Trump will rally the dollar and crush emerging markets. Result? Emerging markets up 15% in the first two months of the year. Watch out for technology because he fought them on the campaign and HB1 visa issues. Result, technology is the leading sector so far in 2017. Trump will be inflationary and bond market will be pummeled. Result, the bond market has now had four consecutive positive months and the 10-year treasury yield is 40 basis points lower than its high point on the year. Look, there are often smart reasons to form a narrative and those reasons simply change. But our point here is a sort of non-controversial one. Consensus media narrative

is wrong so often and so dramatically that to allow it to create investment policy for you is self-destructive. Interesting observation. I normally don't merely pass on ruminations of our key research influences, but I thought this particular insight from our friends at Strategist Research was particularly astute. Coming into 2017, the great opportunity for markets was perceived to be the fiscal reform, pro-growth measures of the Trump administration, tax reform, repatriation, healthcare changes, etc. But the big headwind or risk was perceived to be President Trump's anti-trade biases, the threat of a trade war, general protectionist overhang, etc. Both of these things I think were accurate viewpoints. That indeed was

probably the most optimistic point facing markets and the most pessimistic one. But now 100 days into the new administration, markets are digesting the fact that A, the great opportunity of the growth agenda is not going as well as hoped, just from political difficulties and slowness. And B, the great risk is not materializing as negatively as feared. President Trump backed down on calling China a currency manipulator. The NAFTA renegotiation looks much more benign. Pete Navarro, Trump's controversial trade economic council coordinator,

has been seemingly sidelined on the economic team. President Trump has now walked away from the border adjustment tax, etc. This week, President Trump did announce a tariff on Canadian lumber. But this again happened in the same week he decided he would not rip up NAFTA. Markets basically are in the same healthy spot they were because the good news has not been as good as hoped at this time but the bad news has not been as bad as feared so we're even steven i think that uh this assessment um which again i i was largely borrowing from my my friends that strategist research was nailed quite quite well Parlez-vous, Francais?

By now you should know that France avoided the runoff scenario of two total extremists running against each other and ended up with the matchup in the May 7th runoff that the polls predicted and the markets wanted. Now we're not going to bother predicting what the result will be May 7th, even though we're 95% confident we know, what we do know is this. The two major political parties that have dominated France for 60 years just lost, and lost big. Will a center-left French politician likely be the new president of France?

Yes. But for the traditional socialist party of France to have lost the way it did says a lot about the changing world around us, particularly as it reflects upon Europe. What we do know is that even if Macron defeats Le Pen, the new leader of France is unlikely to have much more than a 40% mandate for leadership. And governance of the highly divided country is not going to be easy. The political center may hold for now, but the forces of radical isolationism have gained disruptive momentum due to the failures of the European Union to deliver.

The cultural crisis is the real story. The economics just flow from that. But for now, the Franco-German access remains the chord on which Europe turns. Again, for now. In all thy getting, get this. The Bonson Group is constantly in a unique position when traditional or conventional investment thinking presents questions to us about tactical market particulars. Do you like small cap right now? What would do better this year, growth or value? These are common questions

that come from the conventions of style box thinking that categorizes equities in a certain way. And we're obviously very familiar with these style and capitalization categories. And of course, we understand why people talk and think that way. But the unique position we are in when asked conventional questions like this is that while we know the vocabulary, we are in when asked conventional questions like this is that while we know the vocabulary, we do not think or talk this way and we do not invest this way. As my investment mentor, Lowell Miller, has often said, our question to answer is, is the dividend safe and will it grow? In those questions, we find investment opportunity and we let capitalizations and styles and other such labels and categories to be retroactively descriptive but never decision

making. There's a chart at dividendcafe.com this week that I would love for you to see pointing out the utter arbitrariness of how the stock market has performed after a year in which we raised interest rates at the Federal Reserve three times. It has happened roughly 10 times, and roughly half the time the market was higher, half the time the market was lower. So I guess that is a nice segue to our next question. What drives markets? If it isn't the Federal Reserve, as earnings go, so goes the market. We're coming up on just a halfway point for Q1 earnings season. But again, projections are pretty strong that we should end up with about a

10.1% jump in earnings for the quarter, largest quarterly increase since early 2014. At the end of the day, it really was a wonderful week in capital markets, a lot of activity on the bottom-up individual company basis, a lot of activity in the political front, Washington, D.C., obviously, around President Trump's new tax plan. And then certainly the international stage has a lot to offer right now. There's plenty to keep us very engaged as allocators of capital and fiduciaries responsible to oversee client investment portfolios. is responsible to oversee client investment portfolios. As always, reach out if you have any questions and do feel free to go to DividendCafe.com.

There's a few other sections this week that we think you'll find interesting about emerging markets and about the likelihood of dynamic scoring helping the congressional case for growth in the economy out of these tax cuts that the Trump administration has proposed. But with that said, thank you for listening to Dividend Cafe, and we look forward to coming back to you for next week's podcast.

Thank you for listening to the Dividend Cafe, financial food for thought.