My monthly webinar for the Zen Investor service is set for Wednesday afternoon. The focus of that presentation is whether the election of Donald Trump changes my stock market outlook.
I thought that would be a good topic to talk with you guys today.
Short Answer = No change
Longer Answer = Keep reading for best and worst case scenarios in this week’s Reitmeister Total Return commentary.
Market Outlook
(WARNING: This is not a political commentary. I have done my best to scrub any hint of personal bias to focus solely on the facts in hand as they pertain to the economy and stock market. Any pro or anti Trump comment you read below is happening in your head...not mine.
Please read the above one more time...then please continue with today’s commentary ;-)
It’s easy to see the tremendous rally for the stock market after the election and assume it means that investors are happy Trump is in office. However, rolling back to the last several elections the stock market rallies amply no matter who wins.
What investors are celebrating is the removal of uncertainty coming into the election that generally creates pullbacks and correction leading up to the vote. Like how the S&P 500 (SPY) had its first negative month in October after 5 straight months in the plus column.
So even though I think that most Presidents have little serious effect on the economy (whereas the Fed has much more sway), there are some policies on Donald Trump’s agenda that could have market moving impact.
Let’s start with the worst case scenario. That being the potentially inflationary nature of some of his policies. Most notably the idea of higher tariffs on China.
Yes, it is fair to say that China does have some unfair trade practices which is not surprising for a centrally managed economy like theirs. Meaning that some industries are subsidized by the government to produce goods at lower prices to win the long term market share trade war with other nations.
However, the true cost of any increase in tariffs will be borne by the US consumer. Meaning the higher cost paid by the US importer will end up in a higher price to the final buyer of the goods.
So. if the new administration really does implement stiff tariffs on China, then expect higher inflation which stalls further Fed rate cuts...and maybe even leads to a rate hike. We can all appreciate how that is not good for the economy and stock prices.
More likely I think the Trump team will use the scare tactic of high tariffs to negotiate some improvement in trade terms that doesn’t overly harm China...benefits US manufactures...and does not generate any serious change in the pace of inflation.
Now let’s shift gears to the best case scenario of what he is proposing. That would mostly come in the form of tax cuts that would rev up economic growth.
This was very successful in his first term. Especially the lowering of corporate taxes which automatically leads to higher EPS which gladly begets higher share prices.
The counter balance to this is that economists will want to make sure that any such cut does not further inflate the deficit which is becoming a greater and greater burden. As John Mauldin says there are no easy answers on the debt front.
One path is to greatly raise taxes which equates to less spending and economic decline (read recession and bear market).
Or the other path is to greatly cut government spending. But given that the Government is 25% of national spending, then even a seemingly modest 5% cut in their spending still equates to a 1.25% drop in GDP (read recession and bear market once again).
Gladly the Trump administration is exploring a variant of the second path which would be to reduce Government spending through greater efficiencies.
The general concept of the Department of Government Efficiency has the potential to be one of the most beneficial to our nation in decades. Or it could be a complete disaster if done wrong. So, we need to watch that closely as it will have important ripple effects to the economy...corporate earnings...and yes, stock prices.
Back to the top...in general new Presidential administrations rarely come through on even a fraction of their campaign promises. That is why I say in general that my market outlook is unchanged.
That being we are still in the midst of a long term bull market. Probably have another 2-4 years on the clock before the next recession and bear market comes on the scene.
However, the easy gains from the start of the new bull market are already in the bag. If we follow through with the historical norms...then this coming year 3 of the bull market will be on the tame side.
That is why my year end target for the S&P 500 is only 6,300. And it wouldn’t surprise me if we spent most of the year struggling under 6,000.
Gladly, that is the sorry tale for the large cap index which has led the bull market parade. 2025 should be a year for small and mid caps to shine overthrowing 4 straight years of large cap (and mega cap) domination.
This begs you to stay fully invested in the market given the bullish landscape. Just do have a larger allocation to small and mid cap stocks to generate outperformance.
I have certainly made that shift with the Reitmeister Total Return portfolio leading to serious gains of late pushing us well ahead of the market averages.
More details on my current favorite stocks in the section that follows....
What To Do Next?
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SPY shares were unchanged in premarket trading Tuesday. Year-to-date, SPY has gained 24.91%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
Does Trump Change Stock Market Outlook? StockNews.com
