The New Military-Industrial Complex

The fourth quarter of 2016 proved to be an eventful one for America. In November, a large portion of the populace decided it was time for regime change in Washington. Fair enough. However, many questions remain about what kind of government we are going to get and how exactly its policies will affect the U.S. economy and, by extension, the financial markets.

So far, the president-elect has mostly devoted himself to selecting cabinet secretaries and other close advisors. By the look of things, the new administration could be described as the New Military-Industrial Complex. Almost all of the cabinet appointees have backgrounds in either corporate America or the armed forces, with little experience in government. Investors want to know what this will mean for the economy.

During the campaign, Donald Trump espoused stimulative economic policies such as lower taxes, less regulation, and increased government spending on infrastructure and the military. These things are undoubtedly beneficial to corporate America and the stock market, at least in the short run. Indeed the stock market has shown surprising strength since the election.

Longer-term, the outlook is far from clear. Some of Mr. Trump’s proposals are at odds with his plan to grow the economy. For instance, his desire to renegotiate our international trade agreements is likely to instigate trade wars with our trading partners. Rolling back our trade agreements would have a profound impact on global economic activity. The 500 largest corporations in American generate approximately 40% of their total revenue outside the U.S. History has shown that trade wars benefit nobody and result in decreased economic activity and higher inflation. Obviously, that is not what investors are looking for.

In other policy statements (or tweets), Mr. Trump has indicated he will target for restructuring entire industries such as healthcare and energy. Together, these two vital sectors of the economy account for 21% of the market value of the S&P 500. It is unknown what actual policy changes the new administration will make, and it is difficult to predict the extent to which the administration will prevail in its efforts.

Hence, in the face of uncertainty, investors should avoid speculating on government policy. Instead, we should stick to market fundamentals and remain diversified.

In his farewell speech in 1961, Dwight Eisenhower coined the term “military-industrial complex.” The circumstances he was referring to then are different from what we face today, but Ike’s warning is still valid. He said:

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military–industrial complex. The potential for the disastrous rise of misplaced power exists, and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted.”

Frederick Maxted                                                                                                                                                                                                                                         1 January 2017