The importance of fiscal policy and technological advancements are critical to future, long-term investment strategies. It appears the Trump era policy will attempt to tax imports, slow immigration and bring jobs back to the U.S. that were outsourced or offshored. The intent is to protect domestic industries from foreign competition and create more jobs in the U.S. Additionally, he proposes to lower the corporate tax rate, cut taxes for the wealthy, and increase infrastructure spending. Plenty of articles have been written assuming accelerated economic growth, but where are the catalysts that will kick the economy into high gear? Are these fiscal policies realistic? The policy details are murky and unpredictable which makes it difficult to realign investments.
An unstoppable force that will effect long-term investments much greater than government fiscal policies is coming and in some ways already here. That force is driven by artificial intelligence (AI) using deep learning robotics in this new wave of information technology. Deep learning machines such as self-driving cars have recently exploded to "superhuman" levels by 2015. This was made possible by the introduction of graphics processing units (GPUs) paired with CPUs that accelerated AI faster, better, cheaper. The semiconductor industry that designs these processing chips works with blue chip tech companies to bring this new technology to the public. In effect, the highly competitive information technology industry will push automation into our lives and displace routine, low-skilled jobs. There will be a great money shift from these laborers into the hands of the tech world. Now is the time to invest in tech.
New Fiscal Policy
The modern world has never been so globally inter-connected through trading networks of goods and services. Like Friedman says, "The world is flat." If the U.S. were to restrict our networks too much by installing tariffs on imports, inflation will rise rapidly and consumers will have less purchasing power. The Fed will continue to raise rates to control inflation, yet again, weakening consumers' purchasing power.
Income inequality continues to plague our nation. Trickle-down economics has failed numerous times, accelerating income inequality. In fact when too much money rises to the top, these top earners cannot spend this great sum of money. This is why corporate profits continue to surge, but wages remain flat. Take for example, Kansas, where Gov. Brownback cut taxes, primarily benefiting the wealthy, who were expected to "trickle down" those savings to middle and lower income taxpayers by adding jobs. After years of promising that the new jobs would show up and make up the budget shortfall, the Kansas experiment has been widely viewed as a failure. Kansans have found themselves with the fifth lowest GDP growth in the nation in 2015 with only 0.2%. Now, Mr. Trump is set to scale up many of these failed concepts to the national level. I've recently read an excellent SA article that dives into income inequality, written by JP Research titled " The Trump Era May Echo Reagan's, But Things are Different This Time."
Also in the mix is cutting the corporate tax rate from 35% to 25%. This cut has been said to primarily benefit small and mid-cap companies due to large corporations already taking advantage of other tax cutting incentives. However, analysis of dozens of earnings calls and investor conference talks recently show that many executives have admitted that they plan to use the additional money for stock buybacks and not expanding their businesses.
Between the corporate tax cut and the personal income tax cuts for the wealthy, no details from Trump have been disclosed regarding how to pay for these massive cuts. I see two possibilities:
- Government programs that benefit the lower class will be gutted to pay for these cuts, again weakening the majority of Americans' purchasing power.
- The deficit will rise significantly by implementing cuts without paying for them.
I've read several SA articles written by well-respected authors (e.g. Brad Thomas) assuming the country is headed for a more pro-business, pro-growth style of governing. I'd like to see their thoughts on how we can fiscally achieve these proposed Trump policies. Where is this funding coming from? What will be gutted? It appears that the Affordable Care Act (ACA) is the first to go, effectively un-insuring 30 million people. There is also no plan to replace the ACA, pulling more money out of the hands of the lower and middle class. How these policies will be paid for is important when realigning investments.
What does all of this mean from an investment standpoint? I expect the consumer discretionary market to underperform the broader market over the long term due to a combination of these new potential policy changes and unstoppable automation of jobs. More on job automation below. Future earnings will begin to lag for companies such as Target (NYSE: TGT), Home Depot (NYSE: HD), Starbucks (NASDAQ: SBUX) and Nike (NYSE: NKE). When are these policies forecasted to take place? Morgan Stanley predicts the corporate tax cut will be 2Q17 and the personal income tax cut 4Q17. In the short term, this market will remain steady but will lag in the long term due to purchasing power reduction of the lower and middle class.
Information Technology Market
Jobs currently outsourced and offshored are done so to minimize labor costs. If these jobs are forced back into the States, the cost of labor will increase. In theory, we will see more job openings available, however, these jobs will be some of the first to be automated. I design facilities for large, blue chip manufacturers and, trust me, robotics are taking over.
Automation of jobs from AI and robotics is a major concern worldwide in the very near future. Research from the World Economic Forum (WEF) has estimated 7 million jobs will be lost to automation by 2020. Most of these losses will come from low-skilled, routine jobs. The WEF also estimates 2 million jobs gained for high-skilled professions such as computers and engineering. I see the following tech news that show us the tip of the iceberg in automation:
- Ford (NYSE: F) announced a new investment of $4.5 billion over five years in electric and autonomous vehicles. Additionally, Amazon (NASDAQ: AMZN) is pairing with Ford to integrate Alexa in their vehicles which allows riders to shop in the car instead of stopping by consumer stores.
- Amazon delivered its first package by drone in December.
- iPhone manufacturer Foxconn plans to replace almost every human worker with robots. The company has said it had automated 60,000 jobs at one of its factories alone.
- Driverless cars are right around the corner. Imagine driverless semi-trucks taking over one of the most common jobs in America.
- University of Oxford researchers estimated in 2013 that 47 percent of U.S. jobs could be automated by the year 2033.
In the long term, there will be no better market sector to invest in than information technology. The time is now to capitalize on market shares of tech. Tech behemoths such as: Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and International Business Machine (NYSE: IBM) are the most sound investments in the world today. Investing in the smaller tech companies can be challenging with this market sector at a high P/E ratio of 26.6, It's difficult to pick winners in the tech world. That's why investing in what makes these complex machines run is wiser: semiconductors. Instead of investing in individual equities such as Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM), why not invest in semiconductor ETFs in hopes of capturing this year's Nvidia(NASDAQ: NDVA). Consider buying semiconductor ETFs such as VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) and SPDR S&P Semiconductor ETF (NYSE ARCA: XSD).
Change is coming and it's time to realign investments. It is difficult to predict what new fiscal policies will be implemented with the new regime change. Damage will be done to the lower and middle class from new fiscal policies and automation of jobs by deep learning machines. The investment game is all about earnings, so when consumers have less purchasing power, earnings will flat-line. The consumer discretionary market will underperform the broader market. The best way to capitalize on the future is to invest in this new wave of information technology driven by the automation of industries around the globe.
Disclosure: I am/we are long AAPL, IBM, SMH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.