First, the risks: we do have a lot of political uncertainty at the moment. U.S. policy is more volatile than usual. Yes, the threat of tariff hikes that could have driven the U.S. dollar higher have subsided, and yes, it is less likely that the U.S. will implement a large infrastructure and tax cut plan that might have persuaded the Fed to accelerate rate hikes. Nevertheless, the policymaking atmosphere in Washington is unusually hard to guess at the moment. Markets seem to have factored in more of the good news than the potential risks.
Policy flip-flops in the US could hurt economic growth
Since Donald Trump took office, there has been a surge in business confidence on the hope that his new administration will cut corporate and personal incomes taxes, relax regulations, increase infrastructure spending, and introduce a pro-growth reform agenda. It had been widely hoped that these measures would lead to stronger economic growth (VOO) and enhanced corporate earnings.
Subdued economic data
But while some economic indicators like the unemployment rate have shown improvements, GDP (SPY) growth is still looking edgy. The first quarter’s real GDP growth rate of 1.4% was the weakest since 1Q16. Additionally, lower inflation, subdued wage growth, and declines in latest average monthly payroll increases are all pointing to the fact that all is not well with the US economy.
Amid the weak economic data, concerns have grown that political differences in the US could derail the Trump administration’s reform agenda. So far, there has been next to no progress on healthcare and tax reform.
Given the fading prospects for tax reforms this year, the IMF (International Monetary Fund) has cut back its growth forecasts for the US (VTI) economy from 2.3% to 2.1% this year and from 2.5% to 2.1% next year.
While the Trump administration is eager to keep pushing for reforms, acute political differences and distractions over pressing international issues are likely to worsen matters. These problems will likely continue to affect US (IVV) equity markets, with wider ramifications for Asian equities (AAXJ) as well.