Letter from America - part one: How will Trump seek to govern?

UK equity fund manager David Docherty recently visited the US to discover more about the new Donald Trump administration and its likely impact on markets. In part one of his findings, he discusses how Trump might govern and the constraints that could limit his room for manouevre.



David Docherty
Investment Director, Thematics
  • President Trump will govern as a transactional “CEO-president”, reducing predictability and increasing idiosyncratic risks for investors.
  • He will not be immune to the normal constraints of congressional votes, time and money in furthering his legislative programme.
  • Any changes to market expectations on legislation could provide scope for active investors to exploit mispriced opportunities.

Setting the scene

The conventional wisdom prior to the presidential election was that a victory for Donald Trump would be bad for equity markets. Instead, the expected “Trump dump” turned into a “Trump bump” as markets moved quickly to price in the winners and losers from the new administration.

More recently, the post-election rally in equity markets has dissipated somewhat as investors take time to assess the details of what the Trump presidency means.

In order to tackle this question, we will attempt to define Donald Trump and outline the constraints within which he will be working. We will then (in parts two, three and four of this Letter) consider the impact on markets of his policies on deregulation, taxation, healthcare, financial services, energy, infrastructure, defence and trade.


Defining @POTUS – a transactional "CEO-president"

As Donald Trump’s Twitter handle changes from @realDonaldTrump to @POTUS, the challenge remains as to how to define the real Donald Trump as we seek to predict his policy actions and their impact on markets.

It is often said that “personnel is policy” but Trump transmits conflicting messages. He appears to have a Reaganesque belief in deregulation, tax cuts and government efficiency but yet a New Deal enthusiasm for infrastructure projects, an LBJ-like commitment to social security and workers’ rights, and a willingness like Teddy Roosevelt to browbeat publicly the elites of big business.

PayPal founder, Peter Thiel, popularised the observation, originally in The Atlantic, that Trump supporters took him “seriously but not literally” whereas the media did the opposite. This is the dichotomy facing investors as they look for additional clues in those surrounding the president.

Indeed, his advisers will impart a range of views to him and he will be variously turning to family members, firebrand ideologues, former Goldman Sachs bankers and conservative establishment-types for input.

In the Congress, there will also be numerous actors whose ideas may find their way into the equation. House Speaker Paul Ryan’s blueprints on tax and healthcare are particularly relevant in this respect. Given that Trump is far from a traditional Republican, there could well be alliances with Democrats and discord with members of his own party.

In addition, it is worth remembering that state governors play a role in many of the federal government’s areas of activity and these relationships will also be important.


Despite all these cross-currents, the best way to characterise President Trump is as a CEO with a transactional modus operandi on fiscal and economic matters. This approach is epitomised by meetings on his first Monday in the job with captains of industry and union bosses.

He has pointed to “the need to bring some business acumen to the White House” and his inaugural address promised to “get the job done”, proclaiming that “the time for empty talk is over. Now arrives the hour of action”.

His cabinet selections from the “military-industrial complex” reflect this and are symptomatic of a desire to “get things done” rather than a manifestation of the “unwarranted influence” which President Eisenhower feared when he coined the term in 1961.

This CEO mind-set can be seen in his appointment of spending hawk, Mick Mulvaney, former congressman and founder member of the Freedom Caucus1, to head the Office of Management and Budget. It is also evident in reports that Trump’s transition team has a plan to cut federal spending by $10.5 trillion over 10 years.

On this basis, suppliers to the government, including defence and healthcare companies, will have to start sharpening their pencils.

For the wider market, a CEO-style of presidency is positive if, for example, it encourages more efficient government operations. However, it is unhelpful for market valuations if companies make uneconomic business decisions because they are fearful of the negative business and share price impact of falling foul of @POTUS tweets.


Playing the numbers game – the constraints of votes, time and money

President Lyndon Johnson believed that counting was the most important skill in politics and historians attribute his many legislative successes to this singular talent. President Trump will quickly realise this too as he identifies and computes the congressional votes needed to support his proposals, while simultaneously calculating their budgetary impact and quantifying the legislative time necessary to enact them.

If 42 is the “answer to the ultimate question of life, the universe and everything” in The Hitchhiker’s Guide to the Galaxy, 51 has only marginally less significance in the US Senate. This is the quantity of votes required for Trump’s top priorities of tax reform and the repeal of the Affordable Healthcare Act, aka Obamacare.

This is because both initiatives are set to be considered as part of what is known as the budget reconciliation process and 51 votes (a simple majority of the 100 US senators or 50 votes plus Vice President Mike Pence’s casting vote) will suffice.

This avoids having to secure the normal filibuster-proof minimum of 60 votes. Horse trading will still be necessary in both Houses of Congress on tax reform as competing solutions are debated amid a cacophony of lobbying appeals.

On the one hand, for example, the GOP (Grand Old Party - nickname for the Republicans) may garner the support of some of the 10 Democratic senators up for re-election next year in states which Trump won last November. On the other, fiscal hawks among Republican lawmakers cannot be taken for granted by party floor managers2, particularly in the Senate where they have a narrow 52-48 edge over the Democrats.

As for the thorny issue of an eventual replacement for Obamacare, the 60 vote math(s) will apply and, as we will discuss later, there will be much debate on issues of cost and coverage.


On the budgetary implications of these policies, the reconciliation procedure has a sting in the tail as it requires that measures are revenue neutral. This will provoke intense debate.

One Republican opponent of Obamacare, Senator Rand Paul of Kentucky, is already agonising about its repeal, given his concerns about incremental costs associated with replacement healthcare legislation.

Any use of “dynamic scoring” by the Congressional Budget Office on tax reform will also bring controversy, given the subjectivity inherent in this process of computing the impact of a tax cut using estimates of its effect on longer term economic growth.

More broadly, Trump’s long-standing promise to maintain social security entitlements and his recent stated commitment to universal healthcare insurance reduce his budgetary flexibility materially.

The other constraint for the Trump administration comes from “Father Time” since parliamentary procedures and opposition ruses can significantly slow down legislative progress. Indeed, the notion that Obamacare can be “repealed and replaced” simultaneously seems outlandish given the complexity of fashioning a functional replacement which guarantees continued coverage on a cost-effective basis.

With a battle looming over the president’s nomination of a new Supreme Court justice and ongoing hostilities on Russian hacking and other issues, valuable political capital and time could well be lost early in Trump’s presidency.

These realities of vote gathering, book balancing and legislative prioritisation will inevitably lead to changes in the expectations baked into markets at any given time. This should provide excellent prospects for active investors to exploit mispriced opportunities in affected stocks.

If you want to learn more on how Trump's presidency might affect your investments:

1. The Freedom Caucus is a congressional grouping of conservative Republican members of the House of Representatives.

2. Party floor managers gauge levels of support for particular legislation among their party’s members of Congress. They also persuade members to vote along in accordance with the party leadership.

Subscribe to our Insights

Visit our preference center, where you can choose which Schroders Insights you would like to receive

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.


David Docherty
Investment Director, Thematics


David Docherty
Follow us

Please consider a fund's investment objectives, risks, charges and expenses carefully before investing.

The website and the content included is intended for US-based financial intermediaries (and their non-US affiliates) on behalf of those of their clients who are both (a) not “US persons” as that term is defined in Rule 902 under the United States Securities Act of 1933, as amended (the “1933 Act”) and (b) “non-United States persons” as that terms is defined in Rule 4.7(a)(vi) under the Commodity Exchange Act of 1936, as amended. None of the funds described herein is registered as an “investment company” as that term is defined in the United States Investment Company Act of 1940, as amended, and shares of the funds described herein have not been and will not be registered under the 1933 Act or the securities laws of any of the states of the United States. The shares may not be offered, sold or delivered directly or indirectly in the United States or for the account or benefit of any “US person.”

The information contained in this website does not constitute an offer to purchase or sell, advertise, recommend, distribute or solicit a subscription for interests in investment products in any Latin American jurisdiction where such would be unauthorized. The information contained in this website is not intended for distribution to the public in general and must not be reproduced or distributed, entirely or partially to any individuals who are not allowed to receive it according to applicable legislation. The investment products and their distribution may not be registered in Latin America, and therefore may not meet certain requirements and procedures usually observed in public offerings of securities registered in the region, with which investors in the Latin America capital markets may be familiar. For this reason, the access of the investors to certain information regarding the investment products may be restricted. Financial intermediaries and Advisors must ensure the information provided in this website is appropriate and suitable to the receiver’s domicile and jurisdiction and according to the applicable legislation.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security/sector/country.

Issued by Schroder Investment Management (Europe) S.A., 5 (“SIM Europe”), rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799

Schroder Investment Management North America Inc. (“SIMNA”) is an SEC registered investment adviser, CRD Number 105820, providing asset management products and services to clients in the US and registered as a Portfolio Manager with the securities regulatory authorities in Canada.  Schroder Fund Advisors LLC (“SFA”) is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with FINRA and as an Exempt Market Dealer with the securities regulatory authorities in Canada.  SFA markets certain investment vehicles for which other Schroders entities are investment advisers.

Schroders Capital is the private markets investment division of Schroders plc.  Schroders Capital Management (US) Inc. (“Schroders Capital US”) is registered as an investment adviser with the US Securities and Exchange Commission (SEC).  It provides asset management products and services to clients in the United States and Canada.  For more information, visit www.schroderscapital.com

SIM (Europe), SIMNA, SFA and Schroders Capital are wholly owned subsidiaries of Schroders plc.