Yesterday’s unexpected election result causes investors to wonder what can be expected over the next few years from a Trump presidency and a divided country. This election has been highly emotional and personal, leaving many of us bleary-eyed and uncertain about the future. The high level of emotion in this election is reflected in global stock markets, which initially sold off on Wednesday following Trump’s victory only to recover strongly as the day progressed. At Crestwood we know that emotions and investing don’t mix well. We try to look past the rhetoric to analyze potential long term outcomes of the election.
Markets don’t like uncertainty and global stock markets initially sold off in reaction to Trump’s surprise victory. Adding to investors’ unease has been Trump’s avalanche of eye-popping rhetoric throughout the campaign. Trump wants to fire Janet Yellen, Chair of the Board of Governors of the Federal Reserve, tear up the North American Free Trade Agreement (NAFTA) and even suggested renegotiating the U.S. debt obligations. These comments are a small sample of his suggested changes that concern investors. With all of these comments long on rhetoric and short on details we are left speculating, for the moment, on how a Trump presidency will affect the markets.Early indications are that President Trump will leave most of the rhetoric and tweets behind, and focus on his priorities. It is important to remember that changes take time, and Washington is a system of checks and balances that prevents one individual from rearranging policy overnight.
Economic Policy priorities
Trump wants to stimulate economic growth and employment via:
- Corporate tax reforms: reduce the corporate tax rate to a flat 15%, and reduce the tax on repatriating profits earned overseas.
- Individual tax reforms: reduce seven tax brackets to three, treat carried interest as income, repeal 3.8% Obamacare surtax on “net investment income”, repeal the AMT tax and repeal most of the estate tax.
- Spending reforms: Increase government spending on infrastructure and defense
Depending on what Congress approves, these priorities would most likely add to economic growth. Also it is reasonable to expect that these changes would expand the annual budget deficit to 6%-7% of GDP from 3.0% today.Economically, the most impactful change could be on trade as Trump wants to renegotiate NAFTA and has even suggested a 45% tariff on Chinese goods. During this election, both parties attacked free trade as many U.S. voters believe that it has made their lives worse. By restricting trade, Trump hopes to keep jobs in the U.S. and improve wages.There are, of course, risks to these types of protectionist policies; tariffs could spark a trade war and increase the odds of a global recession. While improved salaries are good for individuals, wage growth increases the potential for higher inflation and interest rates. As president, Trump will have broad powers to amend trade deals without congressional oversight. We discussed in a recent Perspectives article our concern that many benefits of trade to the U.S. economy are underappreciated. This post is available to review again here.
In summary, we continuously monitor political changes that can affect investors and markets and yesterday’s election results were certainly a big one. Our initial review shows that Trump’s policies could increase wages and economic growth perhaps in a meaningful way. On the downside, we are on alert for higher inflation, higher budget deficits and/or global trade disruptions. Uncertainty drives market volatility and we expect that volatility will recede with added clarity regarding Trump’s cabinet choices and details on his policy initiatives.Yesterday’s trading action bringing stocks meaningfully higher and bond prices slightly lower yet again highlights the unpredictability of near-term market movements. As always, we build portfolios with long term goals in mind. Focusing on long term objectives helps avoid and minimize the emotional aspects of investing and risks of buying high and selling low. Hopefully, we can continue to add value by sticking to our strategy through multiple market cycles and keeping our eyes open for investment opportunities when they arise.