Trump Transition

Nov 11, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

What a week.  Because we have clients on both sides of the political spectrum, I have to make these comments as neutral as possible for fear of offending.  However, a Trump presidency will have an impact in many ways that should be open to discussion.  What we just experienced was no less historical than the Brexit or the Chicago Cubs winning the World Series.  However, in this case, the ramifications are huge (no pun intended).

Let’s go through some of the implications:

Federal Reserve & Monetary Policy – While the Fed is committed to hiking interest rates, the pressure may diminish as fiscal policy takes over.  Many believe monetary policy has run its course.  With a Congress in gridlock these past eight years, fiscal policy was not possible.  Now that Republicans control both the legislative and executive branches, it is conceivable that government spending will increase.  Mr. Trump has made it clear he is not afraid of deficit spending (very much like President Reagan) and intends on making infrastructure a priority for his administration.  On a side note, some have wondered if Janet Yellen, Chair of the Federal Reserve, would be forced to resign.  Her term with the Federal Reserve is over in 2018, and it is likely Mr. Trump will choose to replace her at that time.

Taxes – Mr. Trump’s campaign rhetoric might have been populist, but his tax plan isn’t.  The Tax Policy Center estimates the Trump tax plan would give nearly half its benefits to the highest-income 1 percent – those making $700,000 or more.  Put another way, on average middle-income households making $48,000 to $83,000 would see a tax cut of $1,000 while those making more than $3.7 million would receive a benefit of more than $1 million.  On the corporate front, U.S. multinationals have more than $2 trillion in foreign profits sitting overseas.  Mr. Trump has proposed cutting the 35% tax rate down to 10% on these foreign profits – payable over ten years.  If the last repatriation in 2004 is any guide, companies repatriating profits use the money to pay dividends to shareholders and buy back stocks.  Economists expect deficit spending could add as much as $1.5 trillion to the federal debt over the next decade if his tax plan was to be implemented.

Trade – This one is a sticky subject and perhaps the least clear of Mr. Trump’s plans.  NAFTA has come under fire, but it is uncertain he can do anything without some legislation on the matter.  On the other hand, the TPP (Trans-Pacific Partnership) could very well be dead in the water since it has not been ratified.  What Mr. Trump can do, via executive order, is to levy tariffs up to 15% on goods and products coming into the United States.  One area that comes to mind is automobiles made in Mexico by U.S. manufacturers.  The UAW has stated it will work with Mr. Trump in this area.  No doubt China will be a large point of interest, but it is difficult to know if Mr. Trump’s rhetoric will manifest in some negative action against our second largest trading partner.

As for which sectors could do well under a Trump presidency, we have to turn to industrials, materials, financials and some healthcare companies.  Investors like industrials and materials because of potential domestic spending on infrastructure projects, i.e. road, bridges, airports, electric grid, etc.  Mr. Trump has proposed a $1 trillion infrastructure renewal plan.  Why financials?  Well, because Mr. Trump’s platform was clear on reducing regulations, particularly the Dodd-Frank Bill and the most recent DOL Fiduciary Rule which won’t take effect until April 2017.  The first regards capital requirements for financial companies that are considered systemically important (SIFI).  It has other major provisions, but preventing another financial crisis like that in 2008 is its primary goal.  The second regards fiduciary standards in the financial services industry.  Some argue these regulations and rules make it extraordinarily hard for consumer banks, investment banks and insurance companies to make money.  As for the healthcare sector, it is a mixed bag.  Repealing the Affordable Care Act (aka Obamacare) could hurt insurance companies and hospitals but could help pharmaceutical companies (which have come under some heat for price gouging).  One last beneficiary of a Trump presidency could be the defense sector since government outlays have shrunk each of the past six years.  With a focus on terrorism, it is conceivable a Trump administration will increase spending in this area.

In closing, the election this year came as a shock to many people.  If the past is an indication, I would expect some of you feel unsettled by the result.  Much like the Brexit, markets around the world dropped and then rose to a level well more than where they were before the election.  If there’s anything the day-by-day workings of the market teach us, it’s that slow and steady wins the race.  The short-term fluctuations in the market, which loom so large to investors, have little to do with the long-term accumulation of wealth.  Rest assured, as we learn more about what Mr. Trump’s presidency will bring, we will keep you informed and position your portfolios to take advantage of the opportunities as they arise.

Also, we invite everyone (in the Cincinnati area) to the Olde West Chester Christmas Walk this Saturday.  We prefer to call it the “Harvest” Walk but have been unable to convince the powers that be to change the name!  The hours are from 2 pm to 9 pm, with crowds getting large around 5:30 pm.  There is a parade at 7 pm and things wrap up at its conclusion.  We hope those of you in the area stop by and say hello.  We’d love to see you!  As usual, we will have hot beverages and cookies to stave off the cold and a $100 drawing for a Jags gift card.

November 11, 2016

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