The Independent Market Observer

Trump’s Address to Congress: What to Watch For

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Feb 28, 2017 5:19:36 PM

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address to congressTonight, President Trump will give his first address to Congress—essentially a State of the Union. He has a lot to talk about, and it will be interesting to see what he chooses to focus on. Will he zero in on domestic policy, such as the Affordable Care Act and tax reform? Will he discuss trade? Geopolitics? Will his tone be unifying and uplifting, or will this speech echo his inaugural address? And what will the markets make of it?

Before we sit down to listen, let’s review some of the facts on the ground and the opportunities tonight’s speech presents.

The economy: plenty of good things to say

As we continue to see, the U.S. economy is in good shape—certainly back to normal and potentially headed for a boom. Just today, consumer confidence was reported at the highest level since early 2001. Jobless claims and the ratio of unemployed workers to job openings are close to their lowest levels ever. Wage growth is starting to take off. Employers are worried about labor shortages, and the Federal Reserve is mulling not whether to raise rates but how quickly to do so.

Any discussion of the economy should focus on the fact that it’s doing quite well, and any proposal to accelerate growth—whether through tax cuts or infrastructure spending—should consider those methods’ potential negative side effects and sustainability. Interestingly, Republicans are now more confident about the economy than Democrats, so this point would play to the president’s base.

Markets are also banking on accelerating growth. With the stock market at record highs and rising, investors clearly expect the good times to continue. In fact, economic fundamentals are considered so solid that they have overridden the political turmoil of the past several weeks. The economics portion of the speech would ideally focus on the good news and how to make it even better.

Chance to set policy expectations for Congress

Trump has made few hard policy commitments, allowing everyone to project their own hopes on his agenda. Now that he’s in power, that is starting to change, and tonight’s address could clarify where he stands with respect to Congress.

The Republican Congress has a well-developed set of proposals that it hopes to enact, but these may conflict with several components of the president’s agenda—notably, his apparent commitment to maintain social security and Medicare spending. It’s also unclear where the president stands on border adjustments, a key component of the House tax plan, and what (if any) changes should be made to the Affordable Care Act.

The speech presents a chance for the president to clearly define what he wants Congress to accomplish. If he does so, markets are likely to react positively. If he doesn’t, uncertainty about his plans could eventually start to erode the confidence that has supported markets thus far.

Geopolitics and trade: opportunity to reduce uncertainty

Here in the U.S., most of the focus has been on domestic policy, but this is a mistake, as our real risks come from outside. Among the major disconnects in the new administration is whether foreign countries should act on statements by senior officials (including the vice president, secretaries of state and defense, and others) or on what Trump is tweeting.

Tonight’s speech is a major opportunity for the president to lay out where he sees the U.S. in the world and to allay the very real concerns that are out there. Again, this is a chance to reduce uncertainty, which could help markets both here in the U.S. and globally—or not.

The big picture

Tonight represents President Trump’s first and best opportunity to demonstrate his vision to the country and to the world. Markets have been operating on the assumption that economics will outweigh politics, and this speech will help determine whether that proves out.

Expectations are fairly low, so if the president delivers an optimistic, inclusive, and thoughtful speech, reactions should be positive across the board. Real clarity on what the government will do over the next couple of years (or at least realistic guidance) stands to benefit citizens and markets alike.

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