We are all Surprised at…President Trump. What Should We Watch for – and what might the Impact be on our Portfolios?!
Questions from the Field:
During the course of teaching seminars, writing articles and newsletters, and meeting with clients we hear lots of questions. We will try to address some of the more timely and relevant questions that investors, executives, and retirees are asking us. Our question(s) for this month are:
Q: How will President Trump impact my investments?
Q: What should we expect next year?
My wife and I were up until well past midnight on Tuesday watching the election results with the rest of the nation. To say that we were both stunned and surprised would be an understatement. Most people did not expect Donald Trump to prevail, and our nation woke up to a new and completely changed reality on Wednesday morning.
Now let me hasten to say that this is a very emotional subject, and our nation is quite polarized around this election. You might be either elated or dejected about the outcome, and I am going to stay completely away from any kind of political commentary in this newsletter, with the intent of not alienating any of our readers.
But, since our focus is on economics and investment markets, let's consider how our new president might impact several key areas of the economy and the investment markets; the history of the stock market during new presidents, changes to be alert for during the president’s first 100 days, and how those changes might impact stocks, bonds, and our investment portfolios.
Conventional wisdom on Wall Street was that the markets would plunge into turmoil, and there would be a huge sell- off if the underdog candidate, Mr. Trump, won the election. The stock market seemed to respond that way at first - if you happened to be watching the Dow Jones futures market around midnight, the futures were indicating an opening price of the Dow in the low 17,000 range, which would have been a very significant drop. However, for whatever reason, the markets stabilized in the middle of the night and we were all pleasantly surprised Wednesday morning to see not a downturn, but actually a very strong day with US markets and many global markets finishing well into positive territory, a streak that continued through the end of the week. Will it continue this way? Who knows what the next weeks will hold as everyone, investors and voters, continue to be surprised and try to adjust to the tremendous changes that are soon to come.
We do know however, how the US stock market has behaved after other presidential elections and during periods of simultaneous Republican control of Congress and the Executive branch. The historical record is quite surprising and encouraging to us as investors.
US Stock Market Returns During each year of the Presidential Election Cycle
The stock market does not like new presidents – the first and second year has tended towards subpar returns. This seems to be true of both Democrat and Republican presidents, as the returns early in their presidency are usually worse than those at the end of their term. President Obama’s third year was a notable exception – US and global markets were all negative in 2015, the third year of his term. The data has a lot of variability however, as first year returns have been as high as +43%, and as low as -23%.
If we look a little deeper into the historical data we can identify periods that looked much like the one we are entering – a Republican Trifecta of the House, Senate and President. The results during previous periods like this have been quite good.
US Stock Market Returns During Periods when Republicans Controlled the Congress & President
This trifecta is an unusual event and has only happened very infrequently since WWII. The last time it happened in 2003, the markets had 4 winning years in a row, and only in 1953 (The First Year – see the pattern?) did we have a down year in the stock market.
As encouraging as this is – please remember that the future does not always resemble the past, and there is no guarantee that this will happen again, as strong as the historical pattern may be. It certainly is a data point to help refute or offset the stock market naysayers when it comes to the new president.
The First Hundred Days
Perhaps the best clues for us to try and discern what will happen next year come from Mr. Trump himself. It is traditional for a new president to initiate sweeping agenda changes during his first 100 days. Mr. Trump has already detailed his plans after his inauguration on January 20th. Let’s review some of the significant items that might have a profound impact on the economy and the investment markets. (I have pasted the transcript of his speech regarding his 100 day agenda at the end of this newsletter.)
Corporate Tax Rates
A significant change in US corporate tax rates could potentially be a huge benefit to the domestic economy as well as a boon to the Federal deficit. The US has the highest corporate tax rates in the developed world. Even the progressive/socialist nations of Europe charge their corporations much less tax than we do here. Over the last several years we have read story after story of high profile US companies like Apple and Pfizer relocating their headquarters to more tax friendly jurisdictions like Ireland. Many US based companies have immense amounts of cash offshore as they fear paying taxes if they bring this money back into the US. Apple alone is reported to have $180 Billion in cash in offshore accounts to avoid US taxes.
President Elect Trump plans to lower corporate taxes in the US to levels comparable to other developed nations, which may bring a windfall of money back into our country as US corporations realize their revenues here rather than offshore, giving our government the benefit of greatly increased tax revenue, and our economy the benefit of dollars coming back to the US and spent here rather than elsewhere.
Additionally, President Elect Trump has also offered an amnesty provision, allowing companies the opportunity to re-patriate offshore earnings from prior years, which economists anticipate will result in an avalanche of cash coming back into the US.
What we want to watch for as investors is a new tax policy that treats US corporations similarly to other developed nations and incentivizes and encourages those corporations to keep their earnings at home and pay their taxes here. Many economists believe that if this happens it will provide wonderful results for the US economy and the federal deficit.
Summary – Potentially great for the economy and stock market.
Personal Income Tax Rates
President Elect Trump has promised a Middle Class Tax Relief and Simplification Act, which he claims will reduce a middle class family with two kids tax bill by 35%. Tax cuts are a double edged sword – great for consumer and savers but reduced tax revenues could make the already critical federal budget deficit much worse.
Tax cuts put more money in the hands of US families, which often creates an economic boom. Lower and middle class families tend to spend their extra tax savings resulting in positive ripple effects, especially in consumer goods. Higher income families tend to invest or save their tax savings, which is great for the investment markets. Economists have proven over and over again that a dollar spent by a consumer has a much more potent economic effect than a dollar absorbed by the government. Tax cuts putting more money in the hands of American families might benefit both the economy and the investment markets.
The downside to tax cuts are the consequences to our country’s already dire budget. The federal government spends WAY more money each year than it brings in, which of course results in a gaping annual deficit and is the primary reason that our monstrous national debt keeps bloating at an increasingly rapid pace. If taxes are cut, the deficit and the national debt could become even worse.
Economists argue that tax cuts can drive growth which will in turn increase income and thus revenues, offsetting the tax cuts, and perhaps they are right. This is an area that bears close watching to see what the eventual impact might be.
Summary – May help the economy, Could hurt the Federal budget and debt
Regulation of Business
President Elect Trump is promising sweeping changes in many areas of business regulations, and has stated that for every new federal regulation that two existing regulations must be eliminated. Existing trade treaties like NAFTA might also be renegotiated or replaced.
This hits home for me. As a business owner, my staff and I need to daily respond to and comply with a dizzying and time sucking gauntlet of federal, state, city, and regulatory entities laws, statutes, regulations and requirements. I have a strong and abiding respect for things to be in good order, to be done well and properly and in a law abiding manner. However, many business owners feel as I do, that the regulatory climate has gone too far and in many cases is choking and restraining growth of good hearted and well intentioned entrepreneurs. In my case for example, we could hire another employee and grow and invest in our business and service to our existing clients if we had less of a regulatory burden to deal with.
In general, if businesses are allowed to focus on growth and serving their customers well, they can expand, hire more employees, and be more productive, leading to great results for the economy.
To be fair, there is a dark side to less regulations. The financial crisis of 2008-09 was largely due to the greed and excesses of banks and investment banks run amok without proper supervision. There is no question that some level of regulations must exist. The question is, can President Trump and his administration find an optimal balance to allow robust business growth while still maintaining control and order over the bad operators?
Summary – Cautious optimism that reducing the regulatory burden might result in better business growth.
Healthcare Reform – The future of Obamacare?
Healthcare is doing poorly this year, and had a particularly nasty week the week prior to the election. Why is the healthcare sector lagging? It seems that much of it has to do with the continued bad news regarding the Affordable Care Act. Presidential politics, however, may be the primary mover of performance in healthcare recently.
Mr. Trump has promised to repeal the Affordable Care Act. This creates a great deal of anxiety and uncertainty for healthcare investors, as it's not completely clear what a change in this major government program will have on many healthcare companies. As a result, you saw the healthcare sector zig and zag violently during the election as the polling results of the two candidates changed places.
If President Elect Trump does repeal the ACA in 2017, it leaves a big question mark as to how investors will respond. Interestingly, and to most observer’s complete astonishment, the healthcare sector index jumped dramatically on Wednesday after the election.
Please remember that I am optimistic for health care as a sector over the coming years. It's quite possible that health care will sail through any politics and volatility and have good results over the longer-term time horizon. Sometimes, as an investor, being patient is the best way to respond. In this particular situation, there is much uncertainty wrapped around this sector, and health care has a history over the last three decades of being extremely sensitive to presidential politics.
Summary – Impact unclear. History of healthcare stocks is not great during periods of government change.
Another key item of President Elect Trump’s 100 day agenda is the American Energy and Infrastructure Act. The stated goal is $1 trillion in infrastructure investments over the next ten years. Our country’s infrastructure; roads and bridges in particular, are old, outdated and quite literally falling apart. (Do you remember the bridge on I5 that collapsed into the Skagit River when a truck bumped into it?) Many of our roads and bridges have seen little changes over recent decades, falling woefully behind in capacity as the US population booms.
Improved infrastructure helps us all, moving goods and services more efficiently, and making people and companies more productive and time efficient. I would be overjoyed if my hometown of Issaquah was the beneficiary of some new and improved roads. The traffic in and around our town, as well as most of the Seattle area, has gotten progressively worse in recent years. This program might directly benefit companies that rely on better roads and highways (e.g. UPS, Federal Express, grocery and warehouse stores, etc.), might directly benefit companies in the construction, material and supplies sector, and indirectly benefit virtually everyone else.
Summary – Could be a strong benefit to the economy and markets over time.
The Fed & the National Debt
Mr. Trump does not specifically address the Federal Reserve Bank or the National Debt in his 100 day agenda. He is taking over a nightmare of horrific proportions. Our federal debt today is streaking past 20 Trillion dollars, and it is difficult to understand how to reverse this death spiral we are on without causing a lot of pain in the form of reduced social programs and entitlements and economic and stock market fall-out. I personally cannot fathom why any person would want the job of taking on this Sisyphean task.
Here’s what to watch for; the best case scenario is that President Elect Trump is successful at rebuilding and restoring economic growth. If the US Gross Domestic Product rose to a 3%+ annual growth, many observers feel that the increased economic activity would increase corporate and personal incomes and tax revenue and might be enough to at least shrink and possibly reverse the deficit. That is a hopeful, quite possible and rosy outcome, and stock prices and our portfolios might prosper if that happens.
Another scenario is that the government tries to solve the debt and deficit problem through austerity programs, cutting back on spending. This approach would probably work, but tends to cause so much short term misery that citizens are not apt to be happy with it as we have seen in European countries that have instituted austerity programs. Everyone tends to feel pain with austerity, including investors, and it is possible this would not be a happy outcome for stock prices.
A final scenario is that President Elect Trump does nothing, and we as country do what we have done for the last two decades – kick the can down the road as our debt balloons to ever larger proportions. It would truly be tragic to miss another opportunity to try and fix a horrendous problem.
The Federal Reserve Bank (The Fed) is a strange entity. It is neither a bank, nor is it Federal. It is a private corporation that has the power to create money for the United States. If you want to read a fascinating historical account, study the inception of the Federal Reserve in the early days of the last century. It is startling that our country has ceded the power to create money to a private company.
Mr. Trump has not specifically addressed the Fed in his 100 day agenda, but he has had some very direct and harsh words for both chairman Yellen and the Fed itself. The Fed’s actions are directly tied to interest rates and the strength of the USD. If they are significantly reformed, or if the Fed is even audited, which apparently has not happened in most of our lifetimes, expect some major repercussions as both bond and stock markets are highly sensitive to the actions and words of the Fed.
Summary – Difficult to say what the possible impact might be, but any major action here is almost certain to cause a reaction. Watch stocks, bonds, and gold prices with any presidential intervention into the functions of the Fed.
Bond Market – Much Larger than the Stock Market
Speaking of interest rates, you might have noticed that interest rates spiked after the election. Longer term US Treasury bond yields moved up about 20%+ or so from the levels of this summer. Since bonds decrease in value when rates increase, we also saw bond prices tumble this week. The bond market is many times larger than the stock market, and what happens with bonds has a major impact on how stocks perform. When investors sell bonds they often move the proceeds into stocks. The domino effect looks like this;
Trump Elected - Interest Rates Rise – Bond Values Drop – Investors Sell Bonds and Buy Stocks.
This might be the most compelling explanation for the post-election increase in stock prices. And, it implies that if interest rates rise more, we might see even more bond money shift into stocks, a heady scenario for stock investors.
President Trump will be inaugurated January 20th. By May of next year, 100 days into his first term we will have a better idea of what and how his new policies will affect our portfolios. We will be watching these issues closely. With all this uncertainty, it is a great time to test and review your income plans and investment portfolios to try and make sure you can continue to meet your financial goals and are prepared to deal with any risk next year might hold. I look forward to discussing that in person with you at our next review meeting.
Yes it has been a crazy week, but we live in a wonderful country full of opportunity for the future, and with an amazing history of prosperity and freedom. My hope and prayer for our country is that we will all work together for the common good and for the goals of economic prosperity, freedom & liberty, and peace & safety.
William R. Gevers
PS: We have been repeatedly asked by clients if they could share these e-mail notes with their friends or neighbors. Please feel free to forward this with the stipulation that it may only be forwarded if done so in its entirety with no portions omitted. We would be delighted to share our comments and opinions with your friends, and welcome your comments and feedback.If you received this and would like to be included on our newsletter list, please email us at firstname.lastname@example.org
Copyright 2016 William R. Gevers. All rights reserved.
Gevers Wealth Management, LLC
5825 221st Place SE
The views are those of Gevers Wealth Management, LLC, and should not be construed as individual investment advice. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in an index. Please consult your financial advisor for more information. Securities and advisory services offered through Cetera Advisor Networks LLC Member FINRA/SIPC. Cetera is under separate ownership from an any other named entity.
Donald Trump – 100 Day Action Plan
“What follows is my 100-day action plan to Make America Great Again. It is a contract between myself and the American voter — and begins with restoring honesty, accountability and change to Washington
Therefore, on the first day of my term of office, my administration will immediately pursue the following six measures to clean up the corruption and special interest collusion in Washington, DC:
* FIRST, propose a Constitutional Amendment to impose term limits on all members of Congress;
* SECOND, a hiring freeze on all federal employees to reduce federal workforce through attrition (exempting military, public safety, and public health);
* THIRD, a requirement that for every new federal regulation, two existing regulations must be eliminated;
* FOURTH, a 5 year-ban on White House and Congressional officials becoming lobbyists after they leave government service;
* FIFTH, a lifetime ban on White House officials lobbying on behalf of a foreign government;
* SIXTH, a complete ban on foreign lobbyists raising money for American elections.
On the same day, I will begin taking the following 7 actions to protect American workers:
* FIRST, I will announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205
* SECOND, I will announce our withdrawal from the Trans-Pacific Partnership
* THIRD, I will direct my Secretary of the Treasury to label China a currency manipulator
* FOURTH, I will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately
* FIFTH, I will lift the restrictions on the production of $50 trillion dollars' worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal.
* SIXTH, lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward
* SEVENTH, cancel billions in payments to U.N. climate change programs and use the money to fix America's water and environmental infrastructure
Additionally, on the first day, I will take the following five actions to restore security and the constitutional rule of law:
* FIRST, cancel every unconstitutional executive action, memorandum and order issued by President Obama
* SECOND, begin the process of selecting a replacement for Justice Scalia from one of the 20 judges on my list, who will uphold and defend the Constitution of the United States
* THIRD, cancel all federal funding to Sanctuary Cities
* FOURTH, begin removing the more than 2 million criminal illegal immigrants from the country and cancel visas to foreign countries that won't take them back
* FIFTH, suspend immigration from terror-prone regions where vetting cannot safely occur. All vetting of people coming into our country will be considered extreme vetting.
Next, I will work with Congress to introduce the following broader legislative measures and fight for their passage within the first 100 days of my Administration:
- Middle Class Tax Relief and Simplification Act. An economic plan designed to grow the economy 4% per year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief, and lifting the restrictions on American energy. The largest tax reductions are for the middle class. A middle-class family with 2 children will get a 35% tax cut. The current number of brackets will be reduced from 7 to 3, and tax forms will likewise be greatly simplified. The business rate will be lowered from 35 to 15 percent, and the trillions of dollars of American corporate money overseas can now be brought back at a 10 percent rate.
- End The Offshoring Act. Establishes tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free.
- American Energy & Infrastructure Act. Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years. It is revenue neutral.
- School Choice and Education Opportunity Act. Redirects education dollars to give parents the right to send their kid to the public, private, charter, magnet, religious or home school of their choice. Ends common core, brings education supervision to local communities. It expands vocational and technical education, and make 2 and 4-year College more affordable.
- Repeal and Replace Obamacare Act. Fully repeals Obamacare and replaces it with Health Savings Accounts, the ability to purchase health insurance across state lines, and lets states manage Medicaid funds. Reforms will also include cutting the red tape at the FDA: there are over 4,000 drugs awaiting approval, and we especially want to speed the approval of life-saving medications.
- Affordable Childcare and Eldercare Act. Allows Americans to deduct childcare and elder care from their taxes, incentivizes employers to provide on-side childcare services, and creates tax-free Dependent Care Savings Accounts for both young and elderly dependents, with matching contributions for low-income families.
- End Illegal Immigration Act Fully-funds the construction of a wall on our southern border with the full understanding that the country Mexico will be reimbursing the United States for the full cost of such wall; establishes a 2-year mandatory minimum federal prison sentence for illegally re-entering the U.S. after a previous deportation, and a 5-year mandatory minimum for illegally re-entering for those with felony convictions, multiple misdemeanor convictions or two or more prior deportations; also reforms visa rules to enhance penalties for overstaying and to ensure open jobs are offered to American workers first.
- Restoring Community Safety Act. Reduces surging crime, drugs and violence by creating a Task Force on Violent Crime and increasing funding for programs that train and assist local police; increases resources for federal law enforcement agencies and federal prosecutors to dismantle criminal gangs and put violent offenders behind bars.
- Restoring National Security Act. Rebuilds our military by eliminating the defense sequester and expanding military investment; provides Veterans with the ability to receive public VA treatment or attend the private doctor of their choice; protects our vital infrastructure from cyber-attack; establishes new screening procedures for immigration to ensure those who are admitted to our country support our people and our values
- Clean up Corruption in Washington Act. Enacts new ethics reforms to Drain the Swamp and reduce the corrupting influence of special interests on our politics.
On November 8th, Americans will be voting for this 100-day plan to restore prosperity to our economy, security to our communities, and honesty to our government.
This is my pledge to you.
And if we follow these steps, we will once more have a government of, by and for the people.”
US Money Supply, US Dollar, and Inflation/Deflation Watch
"Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him." - Dwight D. Eisenhower
US Money Supply – Adjusted Monetary Base(http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS#)
US Dollar Price – (DXY) USD Index measured against other currencies(http://www.barchart.com/chart.php?sym=DXY00&style=technical&template=&p=MC&d=X&sd=&ed=06%2F11%2F2015&size=M&log=0&t=LINE&v=0&g=1&evnt=1&late=1&o1=&o2=&o3=&sh=100&indicators=&addindicator=&submitted=1&fpage=&txtDate=06%2F11%2F2015#jump)
Inflation/Deflation -Year to Date price increase in commodities and basics as measured by futures
Velocity of Money – Velocity is a measure of how quickly money is spent. High velocity is typically a precondition for inflation. (http://research.stlouisfed.org/fred2/series/MZMV)