Print Page2017 Outlook: Investment Considerations for Trump Administration
Chief Investment Strategist
CIO, Fixed Income
01/25/2017
WisdomTree’s Chief Investment Strategist, Luciano Siracusano (L.S.), its Director of Research, Jeremy Schwartz (J.S.), its Head of Fixed Income and Currency, Rick Harper (R.H.), and Senior Fixed Income Strategist Kevin Flanagan (K.F.) sat down in mid-December to reflect on 2016 and discuss the forces that could impact global financial markets in 2017. Below is an excerpt from the discussion. You can also access the full roundtable piece below.
Q: What do you see as the key investment considerations as the world prepares for the new Trump administration?
J.S.: Everyone has focused on how Trump’s policies are going to “make America great again,” and from an asset allocation perspective, it is rather conventional thinking to favor U.S. equity markets. But the U.S. equity market has also been where some of the greatest returns have been for the last 10 years. Part of this U.S. bias is motivated by rising yields and a rising U.S. dollar that have made some exposures to international markets appear less attractive, particularly for emerging markets, which tend to be most vulnerable to U.S. dollar shocks. Because the default for many is to over-weight in the U.S., I believe it is useful to consider markets that investors are most fearful of, or where valuations look more attractive. This includes Europe, Japan and the emerging markets.Certainly, if Trump were to initiate a global trade war, all bets would be off for global equities—whether U.S. markets or international markets. But what if Trump initiates a global corporate tax-cutting war, where countries compete to lower tax rates and incentivize companies to invest or increase hiring? This could be very positive for global equities over the long term.
In allocating overseas, I see value and diversification in blending exposures to areas of the market and world that benefit from a strong U.S. dollar compared to those that benefit from a weak U.S. dollar. Examples of this diversification synergy would be to over-weight in U.S. mid- and small-cap companies, which tend to outperform large caps during strong dollar environments, along with Japan (a strong dollar beneficiary) paired with emerging markets allocations that are on the opposite side.
L.S.: We are all starting from the assumption that Trump will be able to pass most of his tax-cut plan through the Republican Congress and that lower rates will more than compensate for any elimination of deductions—and that this will take effect for taxes paid in 2017. I think we will get a tax cut, and to the extent it brings down corporate tax rates, creates incentives to bring home cash held overseas and increases investment in the U.S., I believe you can see stronger GDP growth in the U.S. in 2017 and 2018. However, if the tax cuts don’t pass until late summer, it’s possible they may not take effect until 2018, so the timing will be important for equity markets. If you get reductions in individual rates above and beyond corporate tax reform that, on balance, raises take-home pay (even after the loss of certain deductions), then we may also get rising consumer confidence and consumer spending. Rollbacks on some financial and energy regulations and a repeal of Obamacare may also help fuel regional and community bank lending, energy investment and job growth for small businesses. All these anticipated tax and regulatory changes should benefit companies that produce in the U.S. and that derive a lion’s share of their revenues and profits within the U.S. So I agree with Jeremy that this may bode well for small- and mid-cap stocks over the next 12 to 24 months. The key is what price you pay to own these asset classes. Given the run-up in small and mid-caps in 2016 and since the election, here I prefer to own these asset classes with predominately profitable companies—companies that can maximize the impact of lower corporate tax rates. The advantage of dividend weighting or earnings weighting that exposure—rather than weighting by market value—is you can often raise the dividend yield or lower the P/E ratio on the asset class. After our December rebalance, for example, the WisdomTree SmallCap Earnings Index had a forward P/E ratio just 16 times—a significant discount compared with both the S&P 500 Index and the Russell 2000 Index.
R.H. & K.F.: Investors are pulling forward the perceived positive economic impacts of a potential fiscal stimulus. This is creating a new dynamic for fixed income markets. In our view, domestic politics may be moving from a growth inhibitor to a growth agitator. Ultimately, the long-term impact hinges on several key questions: how clear is the pathway, how long is the fuse, and is government reform even capable of shaking the economy from its “new normal” state? We anticipate one of three scenarios to emerge:• Our base case is best characterized as “Good Trump, Healing World”—the near-term satisfaction of tax cuts and regulatory rollback offset the reality that fiscal stimulus has a longer fuse. Fiscal policy proves to be uplifting but not life changing in 2017.
• “Failure to Launch”—the Trump administration gets a wake-up call as to the way politics is conducted in D.C., while renewed troubles in Europe and Asia keep markets on edge.
• “Shock & Awesome”—everything clicks on the policy front, the economy wakes from its “new normal” slumber and inflation is higher than expected. As a result, the economy begins to accelerate, resulting in a global reflation trade.
Each of these scenarios has very different long-term implications for the capital markets.
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty.Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments.
Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
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About the Contributors
Chief Investment Strategist
Luciano Siracusano is WisdomTree’s Chief Investment Strategist. He is the co-creator, with CEO Jonathan Steinberg, of WisdomTree’s patented Indexing methodology. Mr. Siracusano led WisdomTree’s sales organization from October 2008 until June of 2015, while also serving as the firm’s Chief Investment Strategist. Luciano stepped down as WisdomTree’s Head of Sales in 2015 to focus full time on his duties as Chief Investment Strategist. From 2001 until October 2008, Luciano was WisdomTree’s Director of Research and was responsible for the creation and development of WisdomTree’s proprietary stock indexes. Luciano is a regular guest on CNBC and FOX Business, and speaks and writes frequently on ETFs, indexing and global financial markets. A former equity analyst at Value Line, Luciano began his career as a speechwriter for former New York Governor Mario Cuomo and HUD Secretary Henry Cisneros. He graduated from Columbia University with a B.A. in Political Science in 1987.
Global Chief Investment Officer
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@JeremyDSchwartz
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.
CIO, Fixed Income
Rick Harper serves as the Chief Investment Officer (CIO), Fixed Income at WisdomTree Asset Management, where he oversees the firm’s suite of fixed income and currency exchange-traded funds. He is also a member of the WisdomTree Model Portfolio Investment Committee and takes a leading role in the management and oversight of the fixed income model allocations. Rick has 28 years investment experience in strategy and portfolio management positions at prominent investment firms. Prior to joining WisdomTree in 2007, Rick held senior level strategist roles with RBC Dain Rauscher, Bank One Capital Markets, ETF Advisors, and Nuveen Investments. At ETF Advisors, he was the portfolio manager and developer of some of the first fixed income exchange-traded funds. His research has been featured in leading periodicals including the Journal of Portfolio Management and the Journal of Indexes. He graduated from Emory University and earned his MBA at Indiana University.
Head of Fixed Income Strategy
As part of WisdomTree’s Investment Strategy group, Kevin serves as Head of Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes fixed income-related content and travels with the sales team, conducting client-facing meetings and providing expertise on WisdomTree’s existing and future bond ETFs. In addition, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was most recently a Managing Director. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S in Finance from Fairfield University.
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@KevinFlanaganWT
