Businesses Poised to Benefit Under Trump Proposals
We view the recent U.S. presidential election as pro-business and see it as a positive for the economy and for stocks. In our view, the election will have three major impacts on both the economy and equities. Some of the implications are shorter term and have been significantly priced into the market, while the impacts on equities of medium-term and long-term implications are yet to occur. It is primarily the results of the medium-term and long-term implications where we see tremendous opportunity.

First, the multi-decade bull market in bonds has likely ended due to President-elect Donald Trump’s plan to stimulate the economy driving up both real interest rates and inflation expectations. Trump’s plan to cut taxes and to increase spending will total roughly $4 trillion in fiscal stimulus and should increase economic growth, the budget deficit, and interest rates. The market has clearly recognized this and has taken interest rates significantly higher.

Second, we believe the Trump tax proposals are extremely business friendly. The most impactful and interesting part of the plan, in our view, is the proposal to reduce the corporate tax rate to 15% from 35%. While the ultimate tax rate is uncertain, we estimate that a 10 percentage point reduction in the corporate tax rate would boost S&P 500 earnings per share by about 8%. In the U.S., investors have already factored in a material portion of the potential reduction in tax rates as many low-quality domestically oriented stocks have led the market higher. However, we believe the medium-term impact is underappreciated. In our view, lower corporate tax rates will boost cash flow that can be invested in value-creating projects. Indeed, the nonpartisan Tax Foundation found that while the plan would increase wages 5% over the next 10 years relative to the baseline, it would boost capital investment 20%! It seems likely that if the plan is enacted, business spending will far outpace consumer spending. Overall, earnings should benefit, which should drive the U.S. equity market higher. In addition, significant increases in business spending are likely to accelerate productivity. As businesses have more cash to invest in research and development and to increase capital expenditures, innovation should prosper. In our view, private sector corporate spending drives innovation, which holds the key to productivity and prosperity.

Finally, Trump’s choices for his cabinet positions reflect a strong conservative policy view toward regulation. The financial sector since the 2008/2009 crisis has been the subject of intense regulatory burdens. For example, at a leading U.S. bank, 20% of employees are in compliance and control functions, i.e., not in customer service or revenue/profit generating functions. The percentage represents a doubling of regulatory-driven costs within the business. But many other companies and industries in the U.S. have also been subjected to the growth of the U.S. government’s regulatory bureaucracy increasing the costs of “doing business.” A reduction in these often unnecessary regulatory burdens would support business confidence, new business formation, and risk-taking investments while directly lowering operating costs for companies. In the U.S., the impact on both the real economy and the equity market should be positive if those developments occur.

Alger has been investing in innovation and change for more than 50 years. We welcome innovation not only for what it can do for the U.S. economy but for the investment opportunities it will create. We look forward to identifying and profiting from change on behalf of our investors in the years to come​.

Sincerely,


Daniel C. Chung, CFA
Chief Executive Officer
Chief Investment Officer
Fred Alger Management, Inc.

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The views expressed are the views of Fred Alger Management, Inc. as of October 2016. ​Alger has used sources of information which it believes to be reliable; however, this publication is not intended to be and does not constitute investment advice. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security, or any funds managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities. Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities. References to or implications regarding the performance of an individual security or group of securities are not intended as an indication of the characteristics or performance of any specific sector, industry, security, group of securities, or a portfolio and are for illustrative purposes only.


Fred Alger & Company, Incorporated
360 Park Avenue South, New York, NY 10010 / www.alger.com

800.305.8547 (Retail) / 212.806.8869 (Institutional)​