What if President Trump and the GOP manage to successfully pass a tax cut plan?
S&P and other forecasters estimate an 11% rise in earnings if corporate tax rates can be cut to 20%
Rising earnings should continue to drive the market forward at a similar pace
Rising rates and inflation are potential risks as the US government deficit widens rapidly.
SCENARIOS
TrumpCare
What if Trump and the GOP end Obamacare through the budget process, but are not able to pass a replacement?
Baseline- S&P up 10%, down 10% model changes in treasury rates
What if the S&P has a minor correction and falls 10% over a short timeframe?
While S&P and Nasdaq both fall 10%, a short correction has little impact on economic metrics.
Treasury rates would fall as investors flee risk. Commodities like oil might fall as fast as equities.
Debt Cliff
What if the US is unable to make meaningful reforms to Social Security funding resulting in a likely 25% benefits cut in the 2030s?
Social security funding unchanged, leading to 25% benefit cut in 20 years. Younger boomers forced to accelerate asset liquidation, pulling assets from the market. Lack of spending compounds demand problems seen in the economy today.
Fed Unwinding
What if the Fed takes a slow approach to unwinding the balance sheet, and targets a larger final balance sheet?
Janet Yellen has previously indicated the unwinding process could take a decade and may stick with that slow approach
Ben Bernanke has advocated that the Fed maintain a long-term balance sheet far larger than the pre-crisis $900B
This conservative approach may not roil markets, but could still lead to a “taper tantrum” with a quick rebound.
Global Conflicts
What if North Korea and South Korea fall back into armed conflict as a result of aggression by the new leader Kim Jong Un’s regime?
A real conflict in Korea would impact the Asian region as investors shunned risk throughout northern Asia. A serious conflict would result in the collapse of the North Korean regime, resulting in a potential intervention by China and the United States. The conflict would likely end quickly, but could result in significant damage to S. Korea’s economy and world trade.