The surprising result of Tuesday's election brought uncertainty to financial markets and the economy. Although President-elect Donald Trump has been unusually reticent about the details of his various domestic and international programs, at this point it is possible to make some projections based on his statements during the election period, about how the various policies that he espouses or articulated could impact the U.S. and international economies, and how they might affect our investments.
First, we do not believe that the results of the election require any dramatic changes to your portfolio, which is highly diversified among different industries and issuers. However, Mr. Trump’s stated objectives may cause us to de-emphasize certain industries which might be hurt by his programs, and conversely, concentrate on those stocks and sectors which may have more potential from the anticipated new programs.
This week, Donald Trump issued a “100-day action plan”, which he called his Contract with the American Voter. There is, of course, no assurance that Congress will agree to all or even most of these proposals. That said, it is more likely that Congress and the new President will find common ground since the House and Senate, as well as the Presidency, will be in Republican hands. There is the hope and expectation that a lot more will get done in Washington D. C. than has been the case under the split governments which we have experienced the last 8 – 16 years.
We expect that the new Administration will propose a lower income and transfer tax and substantially higher spending, especially on infrastructure and defense. Infrastructure spending is long overdue, and will have a positive effect on the U.S. economy. Resources will be allocated to highways, roads and bridges.
Another top priority of the new Administration will be corporate tax reform. We expect that it will lower tax rates and end the double taxation of overseas earnings. This may be compensated for by eliminating certain corporate deductions. The White House will probably also seek to tax imports and renegotiate existing trade deals. However, this is likely to encounter substantial opposition from U.S. companies, whose income is mostly derived from foreign sources. Also, Congress itself has historically opposed substantial trade restrictions. On immigration, Congress will probably approve more border security. National security will continue to be a priority.
Republicans in Congress and the President-elect have both stated they want to repeal and replace the Affordable Care Act (“Obama Care”) with a program of less government intervention, such as a health savings account. It’s likely that the subsidies and tax-credits of the ACA will be repealed even if the rest of the law is retained. This will be negative for various hospital and insurance companies.
With respect to economic policy, it becomes much less likely that there will be a federal minimum wage which would affect retail and restaurant industries. The approval of the stalled pipeline and drilling projects would benefit the energy sector of our economy and decreased government regulation would be positive for economic growth, especially for financial and energy stocks. The behavior of the stock market this week was generally positive, with more volatility and rotation of investments. For example, pharma and financials appreciated, while the tech sector sold off. Utilities and interest-sensitive stocks retreated. In the weeks and months ahead, as we all learn more about the new Administration’s initiatives, investors will be positioning portfolios accordingly.
Finally, some other important issues: President-elect Trump has indicated his displeasure with Janet Yellen, Chair of the Federal Reserve, and she may resign before her term ends in 2018. Based on recent comments, we expect that the Fed will raise interest rates by an additional 25 basis points (0.25%) at their December meeting. The ultra-easy interest rate policies of the Fed are likely over, but that is not to say interest rates need to increase more than incrementally.
Finally, some of the suggestions or promises made during the course of the election cannot, in our view, ever be achieved. For example, the U.S. cannot cut federal income taxes and also eliminate the budget deficit, notwithstanding the expected stimulus to the economy from substantial proposed spending on a highway bill ($500 billion +), higher defense spending ($93 billion) and an expected 3.5% increase in U.S. average hourly earnings.
At this early juncture it is premature to predict the extent to which Congress will agree to enact legislation to be proposed by the new Administration, or to estimate the effect of such legislation on the stock market. So for the time being, we plan to “stay the course” watching for interesting new developments, and attempting to stay ahead of the curve. One is reminded of the old curse “May you live in interesting times”.
As always, we are happy to answer your questions and concerns.
With best wishes for the coming Holidays.
This blog post has been prepared by Private Wealth Partners LLC, a registered investment adviser solely for informational purposes. This blog post does not constitute and should not be interpreted as an endorsement of any candidate or political party. This blog post is not an offer of or a solicitation of offers to buy or sell security or investment. The opinions expressed herein represent the current, good faith views of the authors as of the date hereof and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this blog post has been developed internally and/or obtained from sources believed to be reliable; however, Private Wealth Partners, LLC does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this blog post are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and Private Wealth Partners, LLC assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. This material is directed exclusively at investment professionals. Any investments to which this material relates are available only to or will be engaged in only with investment professionals.