We are now two weeks past one of the most surprising election results in American political history. While there are certainly mixed feelings among various groups, everyone is asking the same important question: what does this mean for my portfolio? Further intensifying these uncertainties are the drastic moves in the market following the election results. Are these moves legitimate? Are the markets trending up, down, or sideways now that Trump has won? Or, as we might say, are these simply just “Trumped” up market moves?
The Trump Card: Fundamentals
Short-term volatility is always the result of investors reacting (often overly so) to some event, whether that be a scandal, war, or, in our current case, political upheaval. These short-term market moves are just that: short. Over the long run, however, markets are driven by economic fundamentals – not reactions to events. These sorts of measures include interest rates, the regulatory environment, demographics, and productivity gains (or losses).
With that said, it is our position that the current market moves are in fact being “Trumped up” by rhetoric, not reality. Fundamentals continue to testify that the US economy is heading for a recession, the stock market is way too expensive, and interest rates are likely to go back down before they go up. Government and corporate debt remains at all-time highs and productive investment at all-time lows. And bread-winner jobs remain below their peak at the turn of the century. In other words, the system is already sick. Trump is walking into a house full of dry rot. Remodeling the kitchen won’t help it survive the coming earthquake.
So what effect, if any, will this election result have on our portfolio? In order to give some perspective, let’s consider two areas of importance.
One of the most important factors in economic growth is how much or how little regulatory influence the government maintains over private industry. Communistic, socialistic, and eccesliocratic nations tend to suffer from widespread poverty while laissez-faire nations tend to be wealthy. Why is that? Because regulation squelches productivity growth. The bigger the regulatory apparatus, the less entrepreneurship and innovation in an economy.
On the campaign trail, Trump said regulations are destroying businesses and putting Americans out of work. His priorities include shutting down the EPA, the Department of Education, and gutting the Dodd-Frank Act and Obamacare. Among other things, these sorts of decisions would certainly lighten the regulatory burden on Americans. From a purely economic perspective, this would be a good thing. But, Trump has also said things like: “I am not going to let companies move to other countries, firing their employees along the way, without consequences.” While not exactly clear what this means, Trump can’t possibly accomplish this without new regulations.
If Trump carries through on his promises to deregulate, then that is a positive for the US economy and ultimately your portfolio. It won’t deal with the underlying problems that already exist (bad debt, etc.), but it may help the economy over the next 5, 10, or 15 years. If, however, he becomes part of the Washington establishment he is suppose to be replacing, deregulation is unlikely. In that situation, the bureaucratic nanny state will continue to discourage productive investment. Stay tuned.
President-elect Trump and the Republican Congress have made it a top priority to pass tax reform. One priority is income-taxes, which Trump and Congress have said they want to cut for the top-earners, who pay almost all income taxes. Many believe this will be a boon to economic growth, but questions remain. First off, it remains unclear whether these tax cuts will become a reality. With the upcoming debt-ceiling negotiations early in 2017, the filibuster-capable democrats in the Senate are not without power. If Trump tries to appoint a Scalia-type Supreme Court Justice, repeal Obamacare, and pass sweeping tax cuts, chances are he won’t get them all.
Even if the tax cuts become reality, those at the top are unlikely to spend tax savings on productive investment. Without corresponding deregulation and a normalization of the financial markets, wealthy individuals are likely to continue seeing the investment risks as greater than the potential returns. Furthermore, a tax cut with corresponding spending increases (as Trump promises) will lead to ballooning debt. From that perspective, Trump will also face opposition from more fiscally conservative congressmen.
Trump could make a significant impact is in the area of corporate tax rates, which may drop from 35% to 15%. A tax reduction would provide some breathing room for corporations drowning in debt. Such a change could delay or temper the coming recession.
The Bottom Line
The current market movements are not based on long-term trends and economic fundamentals. We are cautiously optimistic about the effects of some of the Trump’s agenda. But the extent to which he implements these changes remains to be seen. Furthermore, the effect of new policies will have little to no effect on the fault-lines already breaking below the surface.
Here at Plan Financial, we continue to strategically diversify our portfolios, basing our decisions on our forward-looking economic outlook. We do not panic or make emotional decisions. Instead, we focus on economic fundamentals in order to produce consistent, reasonable returns. By doing so, we continue to help our clients maintain their peace of mind and accomplish their objectives. If you’d like to learn more, give us a call or see our contact page.
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