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One Big Wild Card for Stocks

February 2, 2017

Tax cuts, regulatory reforms, fiscal stimulus – many of the Trump administration’s economic proposals have been embraced by investors as proven ways to grow the economy. A major exception is potential changes to trade policy. A recent survey by Strategas Research revealed that trade is the by far the biggest source of uncertainty and angst for investors as they contemplate the market outlook.

Globalization – for all its benefits and drawbacks has been a boon to corporate profits, as it allowed companies to boost exports and take advantage of lower input costs overseas. This dynamic is hinted at in the chart below, which shows corporate profits rising as a percentage of GDP and wages falling. Ultimately, it is corporate profits that drive the stock market higher or lower.

Many proposed changes to trade are aimed at benefiting workers and increasing wages. Whether that can be accomplished without hurting corporate profits remains to be seen. Accordingly, Wall Street will pay very close attention as the Trump administration gets more specific on trade policy. As Ned Davis Research, Inc. indicates, “US trade protectionism may boost economy short-term, but benefits would be quickly eroded by tit-for-tat responses”.

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Source: Hefren-Tillotson, Ned Davis Research

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