Donald Trump staged one of the biggest presidential upsets in history – the last being in 1948 when President Truman defeated Thomas Dewey, resulting in the the Dow Jones Industrial Average (DJIA) dropping -3.8%, the third largest drop after a presidential election since 1900.
U.S. equity markets – specifically financial services stocks – have staged a tremendous rally since 11/9/16 – largely driven by Trump’s promise of reduced regulation of the industry and lower taxes for corporations and the wealthy. The market reaction alone illustrates that our equity markets are still primarily focused on the “bottom line”– corporate profitability. (We have a view on this at the end of this blog.)
A Republican president and Congress have historically been “market supportive.” What are the implications of a Trump presidency and Republican Congress?
There is very little we actually yet know about Trump’s policies. And only time will tell whether he will be successful in implementing his campaign promises. The topics below are written with much humility given that each is extremely complex. However, I have done my best to provide a view on which policies, if implemented, may be market supportive, and which may not:
The following may be considered “market friendly” as they all point in the direction of “free market economy, where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy:
- Lower Taxes/Simpler Tax Structure Trump’s plan is traditional “supply-side” economics where by substantial tax cuts are offered to businesses and the wealthy to emphasize growth. He says he also wants to simplify the current seven-bracket tax code to three: 12 percent, 25 percent and 33 percent of income.
- Less Regulation Trump has indicated that he will substantially reduce and/or eliminate many of the regulations put in place over the past eight years including Dodd-Frank, which was put in place to mitigate the abuses of Wall Street, and the Fiduciary Rule which is set to officially be enforced in April 2017.
- Fiscal Stimulus Trump promises, as did Clinton and Obama, a burst of infrastructure spending – rebuilding highways, bridges, tunnels, schools and airports. While potentially positive for the economy and companies that support such activities, the question has always become, who and how will this be paid for?
The following are likely to be considered “market unfriendly,” however, in the case of international trade and immigration policies, we are truly in untested waters.
- Higher Inflation, Higher Interest Rates While we may have needed a little inflation given concerns about a stagnating economy, the ideal for the market is typically a measured pace of inflation and associated interest rate hikes. Trump’s spending plans are causing the market to revise higher its outlook for the pace of interest rate increases by the Federal Reserve. Since the election, the probability of a rate increase at the December 12 – 13 FOMC meeting has increased to approximately a 94% probability, the highest level this year. This has been reflected in bond prices, which move inversely to the direction of interest rates, with the price of bonds moving down sharply. (If you own bond funds, we recommend that you speak with your financial advisor about the impact of rising rates on your bond allocation.)
- International Trade Trump has threatened to renegotiate or abandon the North American Free Trade Agreement (NAFTA). This would likely result in significant risks of the U.S. auto industry and many others. He has also threatened a trade war with China and other major trading partners by implementing steep tariffs; this would likely disrupt the $165 billion in U.S. exports to China each year, not to mention throwing into doubt the business model of many American companies that import from this country – i.e., Apple.
- Immigration – Trump is pointing the finger squarely at the corporations who bring thousands of undocumented immigrants to work in order to keep costs low and profits high. Corporations, lobbyists and special interest groups will likely lean hard on Trump to “look the other way”.
One other consideration is equity valuations – Trump has implied that we are in another bubble, and would prefer that the markets sell off before he takes office. (If it were only that easy, where we could dictate the market’s action!) Equity valuations, per the chart below, continue to be stretched.
Even if we knew exactly how the policies Mr. Trump campaigned on were going to be implemented, it’s tough to know what the net result would be for corporate profits and interest rates.
So, if we can’t know the results on corporate profits and interest rates, what if we could shift the conversation, taking a more holistic view? What if we became really clear about what we value – and how each dollar we spend or invest reflects these values? How would this affect how we think and feel about our money?
Alexis Advisors is seeking to do just this - through our business model (we are a Certified Benefit Corporation), our financial planning process (we focus on what our clients value first, then align the money choices behind these values) and how we invest client funds (we assess the Corporate Social Responsibility of each fund or stock in which we invest.) Rather than just focusing on the “bottom line” of the companies or funds in which we invest, we measure the social and environmental impact of these funds and companies.
We freely admit that we need to balance our fiduciary responsibilities associated with being a registered investment advisor (we are not brokers, who don't currently carry the same level fiduciary responsibility) with our corporate social responsibility. However, we believe that consumers and investors will be more intentional purchasers and engaged investors if they are vested – and if they make choices aligned with their personal values.
Contact us to join the conversation.