President Trump’s first few weeks in office have been busy on many fronts. However, for investors, his statements on trade policy maybe the most consequential.
JP Morgan's Chief Global Strategist Dr. David Kelly, CFA, explains the differences and similarities among a tariff, a value-added tax (VAT) and a cash-flow tax with border adjustments (BAT) and how they might apply to Mexico. He then examines the effects of each for the U.S. economy, consumers and investors.
Read the entire market commentary here.
In Brief:
- While the first days of the new administration have featured many important statements and decisions, policy changes on trade and corporate taxes could be the most consequential for markets.
- While imperfect, our system of divided government helps to ensure that no leader can implement his or her policy ideas unfettered. With our base case one of de facto divided government, markets may well be facing a largely status quo outcome.
- One possible outcome could be a relatively low-rate BAT as a replacement to the U.S. corporate income tax. Such a compromise could boost U.S. inflation, interest rates, the dollar and after-tax corporate earnings but would be a negative for foreign investments and could trigger damaging retaliation from trade partners.
While the political chess match will be complicated, a replacement of the corporate income tax with a low-rate cash-flow tax with border adjustments seems the most likely outcome. If this occurs, it could boost after-tax operating earnings and the budget deficit. However, it would also add to inflation, potentially increasing interest rates. Finally, it would likely also increase the value of the dollar. In combination, these changes would favor U.S. stocks over bonds and U.S. stocks over international and particularly emerging market (EM) stocks.
Review the full commentary from JP Morgan, or read their 2017 investment outlook. You can also see what our Investment Policy Committee expects from the markets under President Trump.
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