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January 24, 2017 - Stock Futures and Trump's First 100 Days
Futures Market Locked in on Trump's First 100 Days by The Street
Now that President Trump is on the job, stock futures watchers focus like a laser beam on "first 100 days."
Stock market futures are in a holding pattern in late January, and for a variety of reasons including the ongoing earnings season, energy prices, and consumer sentiment all leading into the new year.
But paramount among stock futures traders, at least on a fixed calendar basis, are the first 100 days of the Trump administration, which could be a major table-setter for stock prices going forward.
Right now, though, nothing much is happening, mainly due to events just now transpiring - or about to transpire - in Washington, D.C.
S&P futures were trading at 2,264 in early Tuesday trading, while Dow Jones Industrial Average futures stood at 19,748, up slightly in a week of sluggish market activity, as the market stands by for Trump policy announcements. Of course, the Dow roared above 19,000 as the trading day progressed in a signal of the undulating market we've seen on either side of the inauguration.
"The administration of Donald J. Trump will begin its first week on Monday with a packed agenda," says Tom Siomades, head of Radnor, Pa.-based Hartford Funds Investment Consulting Group, a $78-billion asset manager. "Given the contentious nature of the election, I don't see a lessening of drama from Washington in the coming months; in fact, it will be interesting to see how the markets go about parsing meaningful news amid the rancor."
Siomades says he "would be wary" of industries and high profile companies within those industries, particularly healthcare right now, "that may draw the ire of our new President and his itchy Twitter finger."
What might come first isn't as important as what comes up big, experts say. Atop that priority list is taxes.
"The Trump administration is expected to reduce the corporate tax rate to 15% from 35%, and limit the top tax rate on pass-through businesses -- such as partnerships -- to no more than 15%," says Charlie Smith, manager of the Fort Pitt Capital Total Return Fund (FPCGX) . "The President-elect is also proposing a tax holiday for the accumulated profits of foreign subsidiaries of U.S. companies held overseas."
U.S. companies currently pay an effective tax rate of about 27% due to numerous deductions and exclusions, but even a 20% effective rate would boost aggregate S&P 500 earnings by approximately 10%, Smith points out.
"Interestingly, Wall Street strategists began upping their 2017 S&P 500 profit estimates soon after the election to reflect this change," he explains. As for the tax "holiday," Mr. Trump has said he wants to repatriate about $2.6 trillion in overseas profits at a one-time tax rate of 10%, about a third of what is required by current law. "These funds could then be used for increased U.S. investment, or be paid to shareholders in the form of dividends or share buybacks," Smith adds.
While investors are looking for more clarity from Washington, D.C., market veterans warn against acting too hasty with one's portfolio picks.
"Wall Street tends to get ahead of itself at times and this appears to be one of those times," offers Jenny Jones, head of U.S. small & mid cap equities at Schroders, in New York City.
Jones councils patience, as the new president will need to assemble coalitions in Congress to achieve economic policy goals, which won't be easy. "Things are often harder than you think," she says. "We do believe he will achieve many of his goals but they seem to be close to fully priced now, and they could take nine-to-18 months to accomplish. That leaves a lot of room for disappointment."
Keith Wade, chief economist at Schroders says investors have fully bought into Trump's promise to make America great again. "Thus, activity will be stronger and trade deals more favorable to the U.S.," he says. "Inflation and interest rates are heading higher."
At this stage, though, the reflation trade (buying assets that will benefit from higher inflation) has strong momentum as investors jump on the Trump band wagon, Wade adds. "However, the impact of the new president's fiscal policies will not be felt until end-2017 and into 2018," he states. "There are some tricky waters to be navigated before they take effect."
No matter what President Trump and Congress conjure up economically, experts say, as usual, the old ways are still the best.
"The stock market reacts to the unexpected and the Trump-surprise is old news by now," notes Gary Smith, an economics professor at Pomona College. "Any surprises that lie ahead are, almost by definition, exceedingly difficult to predict."
Smith says that genuine value investors don't try to predict whether stock prices will be higher or lower a few days or weeks or 100 days from now. "With 2% dividend yields and 4% earnings yields in a world with 10-year Treasuries at 2.4%, investors who buy quality stocks today will be glad they did so ten years from now," he states.
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What Are Futures?
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.
A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset their position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.
Futures contracts, or simply futures, are exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, etc.
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