The first couple weeks of the Donald Trump administration have been a whirlwind, with executive orders flying off his desk and key cabinet appointments being locked down.
The flurry of activity isn’t without controversy – in Washington and around the world.
But as a financial analyst, it’s my job to try to block all that noise out and focus on the investment implications of Trump’s moves.
And the way I see it, three of his “America First” policies could push U.S. economic growth – and interest rates – higher over the next several months.
“America First” Policy #1: Repealing/Replacing of Obamacare
Many U.S. companies have had to hire additional workers – and incur higher external accounting expenses – to handle the increased and more complicated compliance regulations on company health insurance plans that came with Obamacare.
These companies are among the largest job creators in the country historically … but the extra taxes, fees, and noncompliance penalties they’ve incurred have restrained growth in the economy and employment, not to mention put significant pressure on profits.
Now that Trump is leading a process to repeal/replace Obamacare, you could see a significant boost in growth across all types of businesses. That, in turn, is bullish for the economy and stock prices … and bearish for bonds.
“America First” Policy #2: Drastically reducing business regulations
On Monday, January 21, 2017, during Trump’s first day of work as President, he met with representatives of many of the largest companies in the world. At that meeting, he vowed that he would “cut business regulations by 75%.
Now you and I both know that’s a very bold claim. But even if Trump’s policies ultimately end up cutting existing business regulations by only 30% or 40%, that would provide business capital to hire more workers, expand growth, and generate greater profits for shareholders.
After all, excessive regulations have collectively cost companies billions of dollars each year.
So the lifting of that financial burden could give GDP growth another shot in the arm … and pressure bond prices lower. That, of course, means interest rates will head higher.
“America First” Policy #3: Reducing corporate income tax rates
Corporate income taxes take a huge chunk out of the cash flow and profits of American companies. But Trump is promising to lower corporate tax rates. He’s also talking about incentivizing companies to keep their operations in the U.S., and hire U.S. citizens.
As a result, I expect to see companies reinvest their tax savings to hire more (and better-trained) employees, improve their infrastructure and technology use, and capture greater market share. All of that is another reason to expect lower bond prices, and higher interest rates, over time.
Bottom line: U.S. 10-year Treasury yields have already risen around 70 basis points since Trump got elected. But if growth continues to accelerate and Trump’s policies take hold, we could be talking about yields of 3.5% rather than 2.5% before long.
So plan accordingly by avoiding investments vulnerable to rising rates (long-term bond funds, utilities, REITs, etc.) and targeting investments that benefit from them (financial stocks, cyclicals, etc.).
Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.