Trump-driven wealth effect should drive stocks even higher next year, hedge fund titan predicts

Robbins: I'm bullish for 2017 but we will see volatility

An activist hedge fund manager who's had a strong 2016 predicted on CNBC on Wednesday that the stock market could go "materially higher" still, if the setup for a pro-economic growth Donald Trump presidency comes to pass.

The prospects for tax cuts and reductions in business regulations has unleashed on Wall Street so-called "animal spirits," emotional feelings about investment prospects, said Cliff Robbins, founder of Greenwich, Connecticut–based Blue Harbour Group, which manages about $3.5 billion in assets. Robbins made his bones as a dealmaker in the 1980s at Kohlberg Kravis Roberts and Morgan Stanley.

Many Americans are watching their 401(k)s soar along with the stock market since Election Day, and that should lead to greater consumer spending, the Blue Harbour boss said in a "Squawk on the Street" interview. "You're going to see a significant wealth effect, with consumers spending more money. I believe that."

Robbins, who calls himself a "friendly activist," said his dealings with company boards recently have also revealed newfound confidence. CEOs are thinking "more positively," he reported. "And that has a circularity benefit as well. They're more willing to talk about a capital expenditure [or] building a plant."

Blue Harbour's long-only fund, through November, was up 13 percent for the year. The firm's long-short fund was up about 7 percent, just about matching the S&P 500's return over the same period. The hedge fund industry overall was up nearly 4.5 percent.

Robbins, while bullish for next year, did warn about a few wildcards that could derail his outlook. Continued gridlock in Washington despite having Republicans in control of the White House and Capitol Hill, as well as any indications of trade wars, could have a chilling effect on the stock market, he said, adding investors might not be accounting for the risk of geopolitical instability.

But the early reading on the Trump transition shows a team determined to boost the economy and ease burdens on business, Robbins said.