Versant Capital Management examines the scenarios.
Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cheshire Cat: Then it doesn’t much matter which way you go.
Alice: … So long as I get somewhere.
The Cheshire Cat: Oh, you’re sure to do that, if only you walk long enough.
Lewis Carroll, Alice in Wonderland
President-Elect Donald J. Trump is poised to take over the White House in January and now that the voters have decided who will be our nation’s president for the next four years, the question is (as Alice would say), where do we go from here? The current environment is filled with speculation and uncertainty as Trump begins his transition to the Oval Office, selecting cabinet members and prioritizing his policy agenda.
Overall, markets have been optimistic in the first weeks following the election (focusing on Trump’s policies rather than concerns about the man himself), contrary to what many predicted, including some of the brightest investors and hedge funds in the finance industry. This is the second surprise market event of the year, on the heels of Brexit, showing yet again that forecasting short-term events may be a futile endeavor. In terms of the medium to long-term horizon, the truth is, we don’t yet know much. One might say that for Trump, it depends on where he wants to get to. The Republicans are by no means unified, but we expect some level of cooperation, since they have control of both levels of the legislature and the executive branch. How may these factors and a Trump administration affect your wealth? Let’s take a look.
Will the election results cause any changes in your portfolio?
We aren’t making any changes to portfolios in the short-term. There is a tendency to make knee-jerk reactions after a large market event, but in reality not much has yet changed. Historically, Versant didn’t make changes after past elections, and the same reasons to remain steady still apply now:
- For the next two months, President Obama remains the leader of our country. Elections induce significant emotional reaction in the weeks following the outcome, and with this election, that effect was magnified because the result was largely a surprise.
- There may be some increased volatility in markets as they start to digest more details from Trump Tower about the transition process, but overall fundamentals have not changed. Regarding changes in the medium- to long-term, we will consider the policies implemented during President-Elect Trump’s term.
- This election may represent the largest ideological shift in the executive and judicial branches of government since the Reagan election. We will continue to monitor policies and appointments, only as they relate to financial matters, just as we did following the Obama election.
Which of Trump’s proposed policies could positively affect your wealth?
The President-Elect has hinted at many policies along the campaign trail that would benefit high-net worth investors. We expect him to be very friendly to corporations, and wealthy families and individuals.
- A proposed reduction in the corporate tax rate will boost profits in the private sector and make the United States more competitive with other countries. In addition, legislation could be introduced to force multi-national corporations to repatriate profits that are being held in foreign tax havens. Both policies would be a windfall for the U.S. economy.
- Income tax rates are likely to remain the same or be reduced across the board, and a repeal of the estate tax is on the table. Paul Ryan’s “A Better Way” plan could serve as a template for these changes, which would translate to substantial savings for high-income earners and estate transfers.
- Regulatory reform could benefit defense, financial, energy, and materials intensive industries, and increase overall productivity. Trump has a lot of room for maneuver here with a cooperative congress and executive authority.
What about negative effects?
Not everything we have been hearing from President-Elect Trump’s team would be positive for investors. He is not a traditional Republican when it comes to fiscal policy and trade, and his administration could slow economic growth in a few ways.
- If Trump backs out of trade deals like the Trans-Pacific Partnership or attempts to repeal or tweak NAFTA, trade frictions could arise between the U.S. and some of our largest trading partners. Since the U.S. is a net importer, these frictions would disproportionately affect those who rely on U.S. demand, such as Mexico, China, and Southeast Asia, which could result in inhibited growth in those nations. Investors with global investment portfolios will feel this in the form of lower expected returns. In the long-run, constricting trade is in nobody’s best interest economically speaking.
- Plans to implement a massive infrastructure building program and increase the defense budget could blow out the government deficit. In the long run, this will negatively affect growth, as the national debt grows to a larger percentage of GDP, and debt service becomes a significant burden. We are not convinced that the return to increased government spending is positive in an environment of unusually high debt.
- Rising short-term U.S. growth may be accompanied by rising interest rates and inflation.
What are we watching going forward?
At this juncture, there are many unknown unknowns about the Trump administration, so we will be watching attentively to see how his term unfolds. As we learn more, there will be possible catalysts for looking at changes in your financial plan and portfolio.
- If the budget deficit is expanded, how will it be financed? There has already been a tremendous increase in liquidity from the monetization of government debt that could lead to surprise inflation if unchecked. We will look to add more hedges against inflation to client portfolios if we feel the deficit or unexpected inflation is getting out of hand.
- Deregulation across industries, such as financials and energy, could lead to a boom in these sectors and create attractive investment opportunities.
- Dramatic interest rate movements in either direction would cause us to reevaluate the interest rate risk in client portfolios. We can adjust our exposure to this risk by increasing or decreasing the duration in your fixed income allocation.
- As we see changes in expected returns and tax legislation, we will adjust the return assumptions and estate planning aspects of your financial plan as needed.
On the whole, policies proposed by the Trump camp may be beneficial for investors and your wealth, if implemented. As the unknown becomes known, we will take the appropriate steps to make adjustments to your portfolio and financial plan to keep your wealth protected. If you have questions or want to talk about how the election could affect your goals, please reach out to your wealth counselor, as always. It does matter “which way you go,” and we are here to help you get there.