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Financial Planning > Tax Planning > Tax Reform

Will Wall Street Finally Get What It Wants From Trump?

By Jane Wollman Rusoff

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With the recent exit of Stephen K. Bannon, President Donald Trump’s chief strategist for seven months, “the Goldman Sachs faction” in the White House has prevailed — and that is indeed a very good thing for Wall Street, pundit Greg Valliere, chief strategist at global investment manager Horizon Investments and an expert on policy and politics’ impact on the markets, tells ThinkAdvisor in a wide-ranging interview.

Wall Street was worried that Bannon would hinder its agenda, says Valliere, who writes Capitol Notes, a smart and savvy daily blog.

In the interview, he identifies the person who is issuing “the most important economic policy coming out of Washington” and discusses Wall Street’s critical concern: Trump’s promised tax cuts, as well as a number of other pressing issues.

The strategist, 68, is fond of the apt term, “the Goldman Sachs faction,” because Treasury Secretary Steven T. Mnuchin and Gary D. Cohn, Trump’s chief economic advisor, are former Goldman executives. Three others in the administration are also alumni of the investment bank. Cohn joined the Cabinet from Goldman, where he was chief operating officer from 2006 to 2017. (Bannon worked at Goldman in mergers & acquisitions during the 1980s.)

Valliere forecasts that, despite rumors last week of Cohn’s leaving in the wake of Trump’s response to the violence Aug. 12 in Charlottesville, Virginia (and that Cohn reportedly “seriously considered resigning” because of it), the former banker is in for the long haul. Not so, Chief of Staff John F. Kelly, Valliere predicts. In the interview, he provides his reasoning.

Valliere, Washington, D.C-based and well connected, has advised large institutions for most of his long career and is a popular speaker at industry events, such as Schwab’s Impact 2016 conference. He was formerly chief political strategist for the Potomac Research Group and also directed research for Charles Schwab Research Group.

With Congress now returning from August recess, Valliere weighs in on the three chief issues lawmakers must attack immediately, as well as offers his takes on the fate of both the Dodd-Frank Act, and — far from least — Trump’s base of Republican support, still polling at about 80%.

Valliere took time out from vacationing in the U.K. this week to chat with ThinkAdvisor from London. Ultimately, he named the market sector he believes will benefit most going forward and gives FAs advice, from an investing perspective, on how to deal with this unprecedented, challenging time in U.S. history. Here are excerpts from our conversation:

THINKADVISOR: How is chaos in the White House affecting Wall Street?

GREG VALLIERE: The infighting is significant because it increases anxiety that we won’t get much done [for the economy]. The departure of Steve Bannon [former White House chief strategist] is a positive story because it means that on economic issues, “the Goldman Sachs faction” has won: Steve Mnuchin [Treasury Secretary], Gary Cohn [Trump’s chief economic advisor] and other Goldman alumni in the administration will dominate. So, in Wall Street’s eyes, the good guys have won.

What’s the significance of that?

There was real concern in the markets that Bannon could have derailed the Wall Street agenda with his desire for trade protectionism, maybe getting into a big budget fight and wanting tax cuts to be different from what some Republicans would like.

What’s your take on the future of John F. Kelly as President Trump’s chief of staff, sworn in on July 31?

Kelly has to realize that he’s been unable to curb Trump’s tweets. He has to worry that he’s bitten into more than he can chew. There’s always a new story that inflames things or some Trump tweet that gets everyone agitated. If Kelly can’t stop Trump from tweeting and make him more disciplined, I think he’ll be gone.

Before he was elected, the word was that business loved Trump. What do you make of companies exiting his business advisory council after his statement that “many sides” were responsible for the violence between white nationalists and counter-protesters in Charlottesville on Aug. 12? After he started losing business support, he ended that forum.

Losing business last week was a big, big deal. What he said about Charlottesville was outrageous. Also, there’s a leeriness on the part of business leaders because Trump can get very angry, populist and critical of business pricing — drug prices in particular. Business is leery that he could burn people who get a little too close to him.

Seems that Trump plays both sides.

He does. Bannon was the biggest advocate of a strident policy toward business. Now that he’s gone, maybe Trump will moderate a bit. But I have to give him credit for the pro-business climate in Washington, in general, after eight years of an adversarial climate during the Obama administration. It’s far more collegial now when it comes to things like regulation.

What effect do Trump’s shocking tweets and inflammatory speeches have on investors?

The majority of political infighting is simply background noise to the markets. Fundamentals are the dominant story: decent GDP growth, a significantly improved labor market, modest inflation, steady interest rates and good corporate earnings. Trump can tweet all he wants — but that’s not going to affect corporate earnings.

To what extent is Trump’s support base eroding?

I’ve seen numbers in the last 10 days showing that close to 80% of all Republicans support him. His hemorrhaging of support is coming from independents.

What does 80% supporting him mean in terms of how Congress needs to deal with him?

Considering how strong his support is in various states, if you’re a Republican senator in a moderate-to-conservative state, you’ve got to be a little careful about how harshly you criticize Trump. Many members of Congress don’t want to be too aggressive on Trump because they’re going to get hell from voters back home.

No matter what seemingly outrageous things Trump says, he always bounces back.

Yes. After [his reaction to] Charlottesville, there was a revulsion of Trump in Congress; but among his base, his support is still very strong. He once said, ["I could stand in the middle of Fifth Avenue and shoot somebody and I wouldn’t lose any voters."] There’s some truth to that. He has the greatest coat of Teflon I’ve seen in my career — greater than Reagan’s.

What’s the biggest thing to watch for the next few months?

The key is if Trump’s support among Republicans starts to drop significantly. If he gets into the 60 percents vs. the 80% he has — which is his life preserver — he’s in real trouble. 

What impact is the Russia investigation having?

That hangs over everything. It’s a real threat for Trump in 2018. [Special counsel Robert] Mueller has put together an all-star team of attorneys very skilled on corruption cases. But he probably won’t be finished [with the investigation] till next spring.

To what extent do events in Washington run parallel to what happens in the stock market?

The dominant factor for the markets is earnings and interest rates. The most important economic policy coming out of Washington is from [Federal Reserve Board Chair] Janet Yellen, and it’s been great. Day in and day out, the Fed is the most significant economic story from Washington. Yellen is reluctant to aggressively raise rates. We may get one hike in December, but she’s in no rush, largely because inflation has stayed dormant.

But do you see a disconnect between the markets doing so well and GDP growth being persistently slow?

Yes. Trump has been bragging about the economy and Wall Street, but Wall Street isn’t lifting all boats; and that’s a concern for him. There are still pockets in the country — Youngstown, Ohio, and Bethlehem, Pennsylvania, for example — that haven’t enjoyed the strong fundamentals. But Wall Street looks at the fundamentals. That’s a major reason the Dow Jones has done so well: Fundamentals are great for Wall Street.

Does business’s reluctance when it comes to capital spending figure into the disconnect?

Yes. Business fixed investment has picked up a little, but I don’t see it picking up dramatically until we can see tax reform clearly moving.

So what about Trump’s promised tax cuts, especially as they relate to the market?

The market has gotten it right that the most important policy story, other than the Fed, is where we’re headed on taxes. I think we’ll get a tax reform bill, but it will come later rather than sooner. It’s virtually impossible to get it done before the end of the year.

How will tax cuts help Wall Street?

The outcome will be enormous for the markets because tax reform will directly affect both corporate tax rates, producing better earnings, and individuals’ taxes. The markets are counting on a tax bill that will significantly lower corporate taxes. The big story for small-cap stocks would be a tax cut in the top rate.

Any other tax-reform positives?

There will almost certainly be repatriation, which allows U.S. companies to bring back profits stashed abroad. That would be a tremendous plus for drug and tech companies.

So are tax cuts the main thing that Wall Street is looking for from Trump?

One of the reasons the market has held up so nicely is a belief that the Trump tax cuts are still alive. Later this fall, it would be a big negative should the market conclude that the cuts are dead.

When might a tax bill take effect?

Probably early spring of next year, or maybe even not till July 1. But as long as the markets are convinced that it’s still alive and that cuts are coming, it’s a positive story. The Republican consensus is that it will be easier to achieve tax reform than health care reform.

What needs to happen to speed up economic growth?

If we get a tax cut in effect as of July 1, I think we can get the economy on a growth path by the end of next year, [rising] to [a rate of] 2-3/4% from the 2-1/4% where it is now.

But Trump said he’d be able to attain a GDP growth rate of 3% to 4%.

I don’t buy the Trump view that we could be at 4%. Ironically, we don’t have enough workers to get to that level. He doesn’t realize that. His ideas of curbing immigration are directly at odds with his goal for GDP growth. America’s business leaders are complaining that they’re running out of skilled and unskilled labor, and that a more liberal immigration program would be a plus.

What’s the biggest threat to the market next year?

There are three: One: Sign of a weakening economy — I just don’t see that. Two: If the markets were to feel that tax cuts are dead and had virtually no chance. Three: Something totally out of left field geopolitically.

Do you think Trump will succeed in getting the Dodd-Frank Act repealed, as he promised?

No. That’s a real long shot. You need 60 votes in the Senate to overcome a filibuster; the Republicans have 52. Could there be tweaking? Maybe, though I doubt it. But the Fed will increasingly be filled with Trump appointees, so you could see some regulatory reform in the way we regulate banks.

What’s happening with Trump’s promise to rebuild infrastructure?

That’s a story for 2018 or later. They still haven’t figured out how to pay for it, and that’s a big obstacle.

What about Trump’s wanting to renegotiate the North American Free Trade Agreement (NAFTA) rather than terminate it, as he previously said he would?

That’s another example of how “The Goldman Sachs faction” will have an influence. They’re lukewarm about a trade fight with China or NAFTA. Banning was the leading proponent of taking very aggressive action on trade. Now that he’s gone, the prevalent view may be bringing individual cases; but I don’t see a blanket trend of trade protectionism or a threat of a trade war.

Trump and majority leader Sen. Mitch McConnell, R-Ky., are reportedly feuding. The president has publicly bashed him on Twitter. Seems self-defeating.

It makes no sense. There are probably about a dozen senators who have been critical of Trump. He doesn’t have a vote to spare, as we’ve seen on the health care vote. So he can’t alienate any more Republicans. 

Increasingly, the view of many is that the real problem isn’t anyone in his cabinet but Trump himself. What’s your take on how his personality and idiosyncrasies impact Wall Street?

Trump’s temperament is a legitimate concern for the markets. A majority of professional investors that I talk to feel that his tweets aren’t presidential.

After Trump’s “many sides” comments about Charlottesville, rumors flew that Gary Cohn, an observant Jew, was leaving the White House, and the market reacted negatively.

Gary Cohn knows that he has a legitimate shot to become the next Fed chairman. So I think he’ll try to look the other way.

What are the chances of Trump’s being impeached?

Still well below 50% because you need a majority in the House to vote to impeach, and the Republicans have about a 40-seat majority. Even if the House were to vote to impeach, you need two-thirds of the Senate to convict. Since the Republicans have 52 of the 100 senators, the chances of getting two-thirds of the vote in the Senate are quite slim.

But do you think there’s any chance the Russia investigation could lead to impeachment?

It could inflict real damage on Trump. It might even get into his taxes. But I don’t see it leading to impeachment. High crimes and misdemeanors is the standard for impeachment, and I don’t see anything right now that would warrant Trump being ousted.

Why won’t Trump reveal the details of his tax returns?

He’s furious that anybody might poke around in his finances. It enrages him that someone would poke around in his business affairs.

Some speculate that Vice President Mike Pence is getting ready to run for president in 2020 if Trump doesn’t. Your thoughts?

If Mueller’s investigation produces bombshells, Pence is an option. But it’s way premature to talk about that. I’ll say this: Pence, without all the drama, would have an easier time getting Trump’s agenda enacted than Trump would with all his distractions, personality [preoccupations] and curveballs. Pence is a veteran of Capitol Hill and knows how to get things done. Democrats feel he’s way too conservative on social issues, but they don’t have a problem with him as a person.

Now that Congress is returning from August recess, what tops its agenda?

Things get very contentious very quickly on the budget. There are three key issues to be addressed: No. 1 is to raise the debt ceiling — and it has to be done before the end of September. [If they delay], on Sept. 28, there’ll be talk of a government default. I don’t think we’ll get that, but just talking about it could make the markets uneasy.

What are the other two major budget issues?

They have to pass a budget resolution, in which will be instructions about “reconciliation for tax reform.” You don’t get tax reform till you get that budget resolution done. The third thing is that they have to come up with the spending level for the next fiscal year that starts on Oct. 1.

Would that one, if not resolved, cause a government shutdown?

I don’t think so, but it isn’t out of the question. [ThinkAdvisor spoke with Valliere a day before Trump’s government shutdown threat over funding a Mexico-U.S. border wall.]

What else is important to know right now concerning Congress?

Overhanging everything is that we’ve got elections in 2018. The real action will be in the House, where there’s a chance that the Democrats could regain control. My guess is that they probably will just miss. And, because of a very unusual split of who’s up [for election] in the Senate, there’s a chance that the Republicans will actually gain seats next fall.

Turning now to investing in the stock market, what sectors do you like? The defense sector stands out as No. 1. It’s a dangerous world; there are global geopolitical threats. Also, there’s overwhelming support from both parties for defense spending. Even many Democrats like it because it means jobs in their home districts. It also means that spending more on defense creates a climate that’s more conducive to increasing domestic outlays.

What’s your best advice to financial advisors at this point?

Stick to fundamentals because they still look surprisingly good. And try to ignore all the histrionic tweets.

— Check out How Greg Valliere Sees ‘the Nastiest Election of Our Lifetime’ on ThinkAdvisor.

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