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Market Implications of the
First 100 Days: What’s Next?
MACRO INSIGHT | 2017
As the Trump Administration approaches the 100-day
milestone, Morgan Stanley Investment Management’s
senior investment leaders discuss how the President’s
policy agenda is affecting their outlook on global equity,
fixed income and listed infrastructure markets.
The Trump Administration seems determined to encourage an increase
in business investment while driving a fundamental shift in economic
policy from managed growth to organic growth, although the market
is learning that this may take longer and be more watered-down than
initially hoped. We believe this means that Fed policy rates should
rise, along with inflation expectations and interest rates. As a result,
we think credit-sensitive sectors of the market should outperform.
In the equity markets, we feel that the impact of the first 100 days has
been slightly negative but largely irrelevant. We believe Q1 market
performance is a result of an earnings recovery and not the Trump
effect. Additionally, the anticipation of fiscal policy reform has greatly
cooled since the inauguration. Looking forward, we believe the Trump
administration could impact the market more favorably over the next
100 days than the first 100.
Regarding infrastructure, the post-election reaction has been mixed,
with some investors still confident in the President’s ability to stimulate
certain areas of the asset class over the near-term, while others have taken
the President’s inability to execute changes to health care policy and to
progress tax reform as a sign that infrastructure initiatives may take much
longer. While we would agree with the view that new laws designed to
directly accelerate infrastructure spending may take longer than originally
anticipated to materialize, certain actions taken within President Trump’s
first 100 days are encouraging, most notably within energy infrastructure
where the President has looked to advance certain capital projects
sidelined during the Obama administration. As the President eventually
executes on his tax policy agenda and the economy continues to improve,
this also should support fundamentals in the sector and be additive to
what has already been a robust start of the year for the asset class.
AUTHORS
JIM CARON
Portfolio Manager,
Global Fixed
Income Team
ANDREW SLIMMON
Portfolio Manager and
Head of Applied Equity
Advisors Team
MATT KING
Portfolio Manager,
Global Listed
Real Assets
MACRO INSIGHT
First 100 Days and Beyond: A Framework
to Understand Trump and Economic Policies
JIM CARON
Portfolio Manager, Global Fixed Income Team
There is a lot of confusion surrounding the Trump presidency, as the administration is just beginning
to define its economic policy. We therefore found it necessary to create a framework to help explain the
potential policy paths (Exhibit 1). The framework comes in the form of a ”decision tree” that helps reduce
complexity and illustrates what might be the logic behind the path of these economic policies that could
otherwise be elusive to many. It is simply our attempt to understand things better and to use it as an input in
our decision-making process. Let us explain the decision paths in more detail.
A FUNDAMENTAL SHIFT IN ECONOMIC POLICY
Trump is not only presiding over but ushering along a fundamental shift in economic policy from what we
refer to as managed growth to organic growth. The connotation of managed growth has to do with the use of
central bank purchase programs to reflate asset prices such as quantitative easing (QE). During this type of
policy regime, fundamentals matter less than technical factors of supply and demand that come from central
bank activities to lower risk premia and reflate asset prices. Organic growth is simply a regime in which asset
prices are driven by more traditional factors such as economic fundamentals. The shift from managed growth
to organic growth has already begun and has preceded the Trump presidency as was evidenced in mid-2016.
President Trump, however, is accelerating the process. Evidence that QE polices are already unwinding is
reinforced by recent discussions by the U.S. Federal Reserve (Fed) to reduce their balance sheet holding of
U.S. treasuries and mortgage-backed securities purchased during QE.
THE “YES” PATH
If you believe this fundamental shift is occurring, then you follow along the “Yes” path. The next question
is how this transition will occur under President Trump. We see it coming primarily from two areas: fiscal
stimulus and regulatory reform.
Fiscal stimulus. Some of the fiscal stimulus could come in the form of infrastructure investment and
spending; however, this will be long-term and with little immediate impact on economic activity. Stimulus
would be stretched out and parceled over many years. The main form of stimulus that would more
immediately be felt is tax reform. In particular, we would look most kindly on reforms that not only lower
rates but create incentives for business investment to increase productivity.
Regulatory reform. In the financial markets, we tend to think of the positives of regulatory reform as
reshaping Dodd-Frank so that it is less onerous. We believe such changes will benefit community, small
and mid-sized banks that tend to lend to small businesses – a sector of the market that has had difficulty
accessing capital and accounts for over 60% of job creation in the U.S. In the industrial and manufacturing
sectors1 , President Trump has been signing executive orders and actively finding ways to reduce excessive
regulatory burdens. This is expected to translate into increases in production and investment in these
sectors of the market.
1
Source: Morgan Stanley
2
MORGAN STANLEY INVESTMENT MANAGEMENT
MARKET IMPLICATIONS OF THE FIRST 100 DAYS: WHAT’S NEX T ?
DISPLAY 1
Investment Decision Tree: Trump and Economic Policies
A FUNDAMENTAL SHIFT
FROM MANAGED GROWTH
TO ORGANIC GROWTH?
YES
FISCAL
STIMULUS
NO
REGULATORY
REFORM
HIGHER POTENTIAL GROWTH
INVESTMENT IMPLICATIONS
Higher: r*, inflation, rates
Credit: less rate sensitive
Source: MSIM, Data as of April 17, 2017.
Note: r* refers to the neutral real equilibrium Fed Funds rate.
INVESTMENT IMPLICATIONS
Lower: r*, inflation, rates
Credit: more rate sensitive
MACRO INSIGHT
Ultimately, the goal of President Trump’s economic plan is to increase potential growth. Note that potential
growth has been declining over the past several years as corporations have been reluctant to invest in their
business. If one does not invest in their business, it is no wonder why productivity and potential growth have
steadily fallen. President Trump’s policies are aiming to reverse this trend.
Judging by the meetings President Trump has had within the first 100 days in office with business leaders
from both small and large companies, he is sending a strong message to corporate America that his
administration will support and encourage in every way the increase of business investment.
From a fixed income investment perspective, it means to us that Fed policy rates should rise, along with
inflation expectations and interest rates. However, we expect this rise to come at a measured pace. Fed policy
is still very easy, and hikes in the Fed funds rate should be viewed as a reduction in excess accommodation,
not a tightening, until the nominal Fed funds rate exceeds their neutral target rate of 3.00%. As a result,
we think credit-sensitive sectors of the market should perform better as support for fundamental economic
drivers of the market improve and reduce default risks.
THE “NO” PATH
If we find evidence that there is no fundamental shift taking place, we could possibly return to the old
post-crisis playbook of the past several years, with central bank polices dominating the technical drivers of
asset prices. The Fed would likely keep rates on hold or possibly cut them. Potential growth and inflation
expectations would fall. Interest rates would stay low and credit may underperform longer-duration, interest
rate-sensitive assets.
CONCLUSION
It is clear that President Trump would like to go down the “Yes” path; however, it is unclear how well he will
be able to execute his economic plans. At the start of his presidency, the market was pricing a high likelihood
that his polices could succeed quickly. As we come to the end of the first 100 days, the market is learning
that it may take longer for his polices to be enacted and that we may end up with a somewhat watered-down
version of what was originally hoped for. Nevertheless, from a macro perspective, the market still believes the
“Yes” path is the right path and that it will prevail. It’s just a matter of time and degree.
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MORGAN STANLEY INVESTMENT MANAGEMENT
MARKET IMPLICATIONS OF THE FIRST 100 DAYS: WHAT’S NEX T ?
What Have Been the Implications of the First 100 Days
of the Trump Administration on the Market?
ANDREW SLIMMON
Portfolio Manager and Head of Applied Equity Advisors Team
Let me answer this question for US equities succinctly: very modest negative, but largely not relevant.
In my January 2017 Outlook, “Did 2016 ‘Steal’ 2017 Returns?”, my contention was that the strong fourth
quarter 2016 U.S. equity returns was the result of the anticipated earnings recovery in 2017. As I wrote:
As much as many pundits have ascribed the market rally to the ascendancy of the Trump presidency, what
really was starting to change was the upcoming earnings inflection.
To be clear, S&P 500 earnings growth for the entire year (2016) was a paltry 0.6%. And yet the index
appreciated by 9.5%, all of which came later on the year.
Why? Because as we enter 2017, earnings growth is estimated at 12%. Much better earnings growth than we
have experienced the last two years.
Now as we end the first quarter of 2017, the SPX has tacked on another 6.07% return. The good news is that
this move year to date continues to be validated by the earnings recovery we are currently experiencing. Hence
I don’t anticipate much downside for the market. The bad news is that adding in equity returns for 2016 and
2017 means we have now largely captured the 2017 earnings recovery. To make further gains from here, forward
earnings must continue to inflect higher. Therefore, we need to see either much stronger economic data or
some other catalyst. If not, we very well may not see much further gains for equities until late this year, when,
consistent with history, the market begins to focus on 2018.
But what about the Trump effect? Clearly, anticipation of fiscal policy reform has greatly cooled since the
inauguration. The health care setback has undermined the belief that corporate tax cuts, tax repatriation of cash
holdings and infrastructure spending would happen in 2017. And that is probably why the market has largely
flatlined since early March.
But if the market had only rallied on these hopes, then surely the market would have given more back than it
has since the health care debacle. To me, this validates the argument that the market is up on earnings recovery,
not Trump. If Wall Street had begun to factor tax reform into their earnings estimates, then inevitably we would
see significant negative revisions for the overall market. Which we are not seeing.
And yet, what if fiscal policy reform actually does begin to take hold? That could well prove to be this next needed
catalyst: We believe Wall Street would be forced to raise numbers if in fact reform does move forward, even if at
a slower pace than what was expected earlier this year. Why? Because now expectations are very low. So the setup
for positive surprise and potential positive estimate revisions could be in place. As I wrote in January:
Fiscal policy reform won’t be linear. Expect some disappointment along the way.
I will take low expectations over high expectations any day. And that sets up nicely for the next 100 days.
For that reason, we believe the Trump administration could impact the market more favorably over the
next 100 days than the previous 100.
MORGAN STANLEY INVESTMENT MANAGEMENT
5
MACRO INSIGHT
Listed Infrastructure Investing
and President Trump’s First 100 Days
MATT KING
Portfolio Manager, Global Listed Real Assets
In the immediate aftermath of President Donald Trump’s victory, infrastructure investing came into sharp
focus as investors forcefully extrapolated outcomes based on campaign promises to improve the state of
U.S. infrastructure. One hundred days after taking office, the ultimate impact of the Trump presidency
on infrastructure remains uncertain. Details on his $1 trillion proposal continue to be scarce, particularly
around the level of private market participation and the mechanisms by which federal policy will translate
down to the municipal and state level. That said, directionally the rhetoric seems positive as the Trump
Administration continues to emphasize their plans to improve the state of U.S. infrastructure. In turn, this
could present opportunities for investors in listed infrastructure securities, where investors can find a number
of companies that may potentially benefit from more attractive tax subsidies or policies the Administration
may put in place to achieve their stated goals.
Listed infrastructure companies may also benefit from new investment opportunities, a greater number
of asset auctions and a more accommodating regulatory environment. While we would caution investors
against premature speculation regarding the ultimate impact of the Administration’s infrastructure plan,
we do believe the potential benefits may be greatest within certain sectors. In particular, Trump’s focus on
improving transportation and energy infrastructure may benefit companies in these sectors on both a direct
and indirect basis.
THE CASE FOR GLOBAL LISTED INFRASTRUCTURE
Regardless of the attention infrastructure has received post-election, the benefits of listed infrastructure
remain unchanged. Infrastructure has gained an increasingly prominent role in investors’ multi-asset class
portfolios over the past several years due to a number of advantageous investment attributes, including
historically attractive risk-adjusted returns, diversification benefits from low correlations with other asset
classes, an ability to generate current income, and potential protection against inflation.
Infrastructure has also been sought for its ability to help generate long-term, inflation-protected, stable cash
flows and many investors have turned to the asset class seeking a more reliable income stream. While much
of the early attention the asset class received was focused on direct, unlisted investments, we believe an
investment in listed infrastructure securities, can provide many of the same benefits as investing directly in
the core infrastructure markets, with the added potential benefits of greater liquidity, lower fees, and greater
geographic, regulatory, and industry diversification.
In conclusion, for both the U.S. and outside of the U.S. fundamentals within the infrastructure universe,
generally are stable to improving despite the uncertain macro environment. We believe that Trump’s
focus on increased spending in infrastructure, should it materialize, may have a positive impact on
infrastructure stocks.
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MORGAN STANLEY INVESTMENT MANAGEMENT
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