Could Trump turn out to be good news for Foolish investors?

Since Donald Trump was elected US President on 8th November 2016, the FTSE 100 has risen by around 8%. Therefore, it could be argued that Trump has been good news for investors.

What matters to Foolish investors, though, is how stock markets will play out in future, not the past. In this respect, Trump could be a good thing. His promise to spend more on defence and infrastructure while also reducing taxes could act as a stimulus on the US and global economy.

Furthermore, investors seem to be focused on his economic rather than social policies. Therefore, much of the concern surrounding his presidency on topics such as immigration may not affect share prices.

However, the Trump presidency also brings uncertainty and the potential for higher inflation. Could this weigh on share prices and lead to a reversal of recent gains? Or will investors brush to one side the potentially damaging effects of Trumponomics?

The promise of greater spending

A large proportion of the gains made by the FTSE 100 since the US election have been due to the promise of greater spending under President Trump. While specific details are somewhat unclear at the present time, it appears as though spending on infrastructure and defence in particular will rise.

This should have an overwhelmingly positive effect on US economic performance, since spending in those two areas generally feeds through to increased jobs and greater economic activity.

Less clear is the impact of proposed tax cuts for businesses and individuals in the US. While some businesses may choose to invest tax savings, others may decide to build up their cash resources or return excess cash to shareholders.

Similarly, individuals with more disposable income may increase their spending levels, or decide to pay down debt. However, it seems likely that tax savings will have at least some positive effect on spending levels. This could boost US economic activity and GDP growth, which may lift share prices across the globe.

Increasing uncertainty

However, Trump’s economic policies could lead to challenges in the near term and in the long run. In the short run, a looser fiscal policy may result in a more restrictive monetary policy.

This could mean fast-rising interest rates, which may lead to negative effects for businesses and individuals in the US. That’s because the cost of servicing debt is likely to rise. One possible result of this may be a decline in consumer spending and business investment, offsetting at least a portion of any potential tax savings.

Furthermore, a higher rate of inflation could lie ahead. This would be likely to accelerate the rise in interest rates which is already planned by the Federal Reserve.

A rapidly changing economic outlook may cause confidence among individuals, businesses and investors to decline to a degree, which could mean share price valuations move lower over time. This could equate to lower rises in stock prices, or even falls over the medium term.

Invest in politics?

An ever-popular question for investors is whether to invest – or not invest – based on a certain political candidate or political issue (like, dare I say, Brexit).

In some cases, there are very good investment theses to be found. When it comes to Trump, for instance, higher infrastructure spending and/or higher defence spending has very clear investing implications.

The more serious the new US President seems about these programmes, the more potential there is for investors to benefit from being invested in companies in line to see a share of that increased spending.

On the other hand, as I’ve already suggested, the eventual outcome of many political developments can be unclear and uncertain. Some that seem like a positive may indeed prove a negative for some companies, while some perceived negatives may actually create opportunities for certain companies.

Foolish takeaway

The Trump presidency has thus far generally been positive for investors. It could continue to improve investor sentiment and the global economic outlook.

Some of his proposed plans – like increased spending on infrastructure and defence – may be worth investors following more closely, since they could provide some investing opportunities.

However, much of the “Trump effect” that we can estimate today remains relatively uncertain and difficult to predict.

For that reason, Foolish investors will be above all served by sticking to what has tended to work in all markets and under all types of political leadership. Namely, seeking out high-quality, well-managed companies that are producing goods and services that customers love.

These are the types of companies that have the potential to survive and thrive regardless of what the Trump presidency brings.

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