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“Trumponomics” refers to a set of economic policies proposed by United States (US) President Donald Trump post winning the US election in November 2016. The policies were seen by investors as an attempt to “reflate” the US economy into a new period of economic growth. The foundation of these policies were cuts to personal and corporate taxes and the introduction of fiscal stimulus programs related to infrastructure and defence.
Trump has proposed to downsize the tax bracket groups from seven to three and reduce the top marginal tax rate from 39% to 33%. Companies were also set to benefit from a reduction in the corporate tax rate from 35% to 15%. On fiscal (government) spending, Trump proposed to reduce non-defence discretionary spending by 1% a year, but increase spending on defence and infrastructure.
Financial markets have embraced the reform potential under the “reflation trade.” Equity markets have experienced a broad based rally since Trump’s election win in November 2016, with minor setbacks from geopolitical issues easily overcome. However, volatility has tended to increase when Trump has attempted (and failed) to pass the legislation to repeal Obamacare.
SP500 Performance since October 2016
“Obamacare” refers to law intended to improve the affordability of access to health insurance for US citizens implemented by the Obama administration. Trumps ability to repeal Obamacare is now seen as highly important, given it is symbolic of the administration’s ability to win the necessary support for his larger, more important economic policy changes.
The Trump administration we will be disappointed by its failed attempts to repeal Obamacare, with investors becoming increasingly sceptical about the overall ability of the Trump administration to implement change. Questions are now being asked whether the broader tax reform will occur anytime soon (or at all). Cuts to Obamacare would free up funding of about $834 billion from 2017 to 2026, and thus the government would use part of this money to finance the tax reforms. Trump has said the overhaul is not dead and he will try again after some additional lobbying with the key players.
The Trump administration has a broader vision to pass the tax reform in 2017. However, with the year well advanced and a second failed attempt on Obamacare, investors will want to see some tangible economic policy success prior to the end of the year to justify their initial enthusiasm.
With no significant changes having yet been implemented by the Republicans; will market remains well behaved in the second half of the year or will some of the uncertainty surrounding the Trump administration be reflected in global stock markets? For now Trump retains the confidence of investors, with his promises to the American people being as good as the actual reform.