Nima

Director of Client Relationships
Responsible for the management & development of the easyMarkets client base as well the development of our IB partner program.

Many believe that a Republican government may be better for US markets since this political party is known for its business-friendly policies and for limiting the government’s role in terms of regulation. With this type of bias, Republicans usually get a lot of support from corporate America and foreign investors compared to Democrats who are seen to rely on government intervention to spur economic growth, which is often financed by higher taxation.

The incoming Trump administration has relied heavily on promises of tax reform, healthcare overhaul, increased infrastructure spending, and banking deregulation throughout the campaign. After Trump’s victory was announced in the November elections, US stocks staged a strong rally as companies and investors had high hopes for prolonged stock market gains with fiscal stimulus. How might these Republican policies affect financial markets?

In general, Republicans may have favored less regulations on businesses, allowing them to focus on pursuing benefits with less regard for environmental safety, labor union interests, healthcare benefits, and retirement payouts. In times of an economic slowdown, Republicans may resort to adjusting monetary levels by lowering the Federal funds rate or banking reserve ratios in order to stimulate lending and spending.

However, historical data suggests that these Republican policies may not always translate to stronger market performance. According to an article published on the Journal of Business & Economic Research, the average annual stock return for a Republican president is 7.88% while that of a Democrat president is 15.08%. Then again, this also hinges on whether the White House and the Senate are united or divided. After all, pushing fiscal policies and government reform have less friction when both Houses are on the same page, thereby dampening the odds of a government shutdown.

In this particular case, Republicans also have control of the House of Representatives so Trump has a very strong political base. Not only does the party have control of the Senate as well, but it also won most of the country’s governorships. The last time this happened was in 1928 when Herbert Hoover won the presidency, and the last time the Democratic party ruled all three was in the first term of President Obama in 2009.

With that, GOP leaders may find it easier to undo Obama’s initiatives such as Obamacare and the new Environmental Protection Agency controls over wetlands and power plant emissions. Instead, they plan on replacing these with more market-driven patient-centered legislation that may boost health savings accounts and make the industry more competitive for insurance companies. Republicans also want to slash taxes for people and corporations, aiming for stronger spending and investment.

If this is indeed the case, Wall Street may be able to extend its post-election gains as companies seek higher returns and investors are encouraged to ramp up trading volumes. Trump has said that no American business would pay more than 15% in taxes compared to the current cap at 35%. However, some worry that these massive tax cuts only favor the rich, increasing the burden on middle-income Americans. There’s also the question of how increased infrastructure spending may be funded with lower government revenues.

Another cause for concern is Trump’s trade negotiation plans. He has staunchly opposed the Trans-Pacific Partnership deal and plans to make changes in the NAFTA pact with Canada and Mexico. While he prides himself as an excellent negotiator and businessman, things might be a little more complicated in the international stage where cultural and diplomatic lines must be respected. Offending any of the US major trade partners may have significant repercussions on international relations, thereby weighing on demand for US exports which may hurt company profits. For instance, Trump has spoken about imposing 45% tariffs on goods from China, leading many to worry about a potential trade war.

What’s particularly interesting about the incoming administration is that its plans are not exactly in line with its political party’s beliefs. According to House Speaker Paul Ryan, many of the policy divisions between the GOP and Trump are still in play as he moves closer towards officially taking office. In particular, Ryan mentioned that the party is not in agreement with Trump’s plan to impose deportation force on illegal immigrants and using tariffs to prevent companies from taking jobs overseas as this might result to collateral damage to the economy.

In conclusion, it’s tough to tell based purely on past Republican performance how the incoming Trump administration and its Republican stronghold may impact the markets. While Republicans may have an inclination for business-friendly policies and fewer restrictions in the pursuit of profits, any damage to trade relations may wind up doing more harm than good overall. Talks of dismantling or restructuring nuclear arms deals could also complicate matters.

Granted Trump’s plans to repatriate jobs back to the homeland may support the ongoing progress towards full employment, higher costs of labor in the US may also eat up a chunk of companies’ profits. Even though the White House, Senate, and House of Representatives are all under Republican rule, it also doesn’t guarantee that everything will be smooth-sailing as some GOP members aren’t exactly seeing eye-to-eye with Trump. Tax reform is a tricky issue as well since it may be difficult to finance higher government spending from lower collections.

For now, uncertainty is still the predominant sentiment leading up to the leadership change in America but investors appear confident that the markets may resume their normal pace by the time the dust settles. A few months in office may give traders a better idea of how Trump may steer the US economy, whether it’s towards being great again or undoing the years’ worth of progress and recovery after the financial crisis.

 

http://www.investopedia.com/ask/answers/regulating-economy.asp 

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