The Odds of Trump Tax Reform are Tied to This Area of the Stock Market

Penn Mutual Asset Management

April 12, 2017

The Odds of Trump Tax Reform are Tied to This Area of the Stock Market Photo

Penn Mutual Asset Management CIO Mark Heppenstall contributed an article to The Hill where he outlined how the “Trump Trifecta” of taxes, regulation and infrastructure stand to impact markets. The post originally appeared on The Hill on 4/10/17 and can be found below.

Among President Trump’s major campaign slogans was to “drain the swamp” in Washington. Newt Gingrich, one of Trump’s staunchest allies, posted to Twitter following Election Day that “the alligators (in DC) should be worried.” Following a bruising Republican defeat to repeal and replace the Affordable Care Act, the score stands at Alligators 1, Trump 0.

Despite the recent failure on healthcare reform, stock market investors have not given up hope for timely passage of Trump’s other pro-growth economic policies. Stock market performance has so far been extremely resilient in the face of negative news since President Trump took office, even as the ObamaCare repeal and replace legislation looked more and more unlikely to make it out of the House.

However, if meaningful tax reform and other pro-growth policies appear likely to head down the same path, stock market investors will not remain so patient. For investors trying to gauge the likelihood of the eventual implementation of the Trump economic agenda, financial sector performance should be a valuable barometer. Bank and finance stocks are uniquely positioned to benefit from every important part of the new administration’s economic agenda — the “Trump trifecta” of taxes, regulation, and infrastructure.


Bank and financial services companies are clear beneficiaries of the proposed reduction in the corporate tax rate. According to the NYU Stern School of Business, financial institutions, which currently pay an average effective tax rate of 30 percent, would receive an immediate boost to the bottom line with the proposed 20 percent reduction.

Importantly, highly levered banks and financial firms are excluded from a provision in the current House tax plan, which eliminates the deductibility of corporate interest expense. Banks also stand to benefit from the likely boost to U.S. economic growth and investment from a reduction in corporate and personal tax rates.


After the implementation of significant domestic and international financial regulatory reforms after the 2008 crisis — the Dodd Frank Act, Volcker Rule, Basel III — banks were pushed to behave more like utilities and had limited opportunity for growth. Incredibly, Bloomberg found that 30 percent of the rules mandated under Dodd-Frank have yet to be implemented due to the unmanageable complexities handed to regulators. Mounting regulatory compliance costs and stricter capital requirements have also been a drag on earnings for financial firms.


One trillion dollars of new infrastructure spending will support financial firms in two significant areas. First, infrastructure development will support overall economic growth and credit creation. More efficient transportation systems and communication networks in addition to better use of energy and water resources should boost productivity and make companies more competitive. New employment opportunities created as part of the infrastructure spending program should incite consumer spending and borrowing.

In addition, the trillion dollars in proposed infrastructure spending is almost certain to be financed with additional Treasury borrowing. The impact on interest rates is likely to be even more pronounced if the Treasury joins many European sovereign borrowers with 50-year or 10-year debt issuance. The new spending will likely result in higher interest rates and a steeper yield curve, both boosting bank net interest margins and earnings.

The Trump economic policy trifecta — tax cuts, reduced regulation, and infrastructure spending — has already boosted financial sector performance to their highest levels since the financial crisis. Investors need to keep a close eye on valuations moving forward to assess the odds of Republicans finally coming together or simply more gridlock in Washington.

Tags: Viewpoints | U.S. economy | Regulation | Tax reform | Trump Trifecta | Infrastructure

< Go to Viewpoints

The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications