China Will Stop the Trump Rally Dead In Its Tracks

The market reaction to the Trump Presidency win has been excessive to say the least.

Trump won’t take office until January 20th 2017. And he will likely not be able to engage in any of his proposed reforms until this time next year (it’s possible he might be able to ram through a few bills via “reconciliation” in Congress, but the odds are likely that any major reforms will take a year).

And yet, the financial media are abuzz with the idea that somehow GDP growth of 5% is going to hit in January. And investors are acting as if they believe this!

Let’s run through Trump’s proposals quickly.

1)   Tax Reform: Trump wants to simplify the tax code, lower the corporate tax rate and offer multinationals the ability to repatriate their offshore cash with a one-time tax charge of 10%.

Long-term, all of these moves are positive for the US economy. They will increase competitiveness and will allow large firms to put more money to work in the US.

However, NONE of these items will have a major impact on the markets. Yes, a lower tax rate opens the door to greater corporate profits… but:

a.     As Tom Lee noted on CNBC, NO ONE gets excited about investing in a company because said company is going to be paying less in taxes.

b.     Any benefits from tax reform would take at a minimum six months and possibly a year to really begin trickling into corporate results.

c.      More importantly, most large corporations are already paying little if any taxes due to various gimmicks and loopholes. The Government Accountability Office found that in 2012 more than 43% of large corporations (those with $10 million in assets or more) paid no corporate income tax.

2)   Deregulation/Infrastructure Spending/ etc.: None of these will likely be implemented until late 2017. A large-scale stimulus is a controversial measure that might not get through Congress. Even if it did, we already know such policies have minimal effect on GDP particularly late in an economic cycle (Bush’s Stimulus act of 2008 and Obama’s Stimulus of 2009).

My point with all of the above is that any policies Trump implements will have minimal impact on stocks in the short-term. They CERTAINLY do not warrant the absolute mania we are currently experiencing in the stock market.

Meanwhile, China, the second largest economy in the world, is on the verge of a banking crisis. 

In the last three weeks, China has:

1) Been forced to issue emergency loans to financial firms.

2) Halted trading in its bond market multiple times.

3) Has aggressively defended the Yuan.

The fact is, stocks are poised for a sharp correction (at least) based on what's happening in China...

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research