Sometimes the unexpected happens. As you know, President – elect Trump won a substantial victory in November. We thought it was possible, but not likely. This reminds us of the U.K. vote to exit the European Union — nobody thought it could happen, but it did.
Elections have consequences and the impact on U.S. economic policy will be enormous . Over the last eight years, we have had a plow horse economy — Trump wants a race horse economy. Out of all the actions likely, the one that should help the economy most is corporate tax reform. A big tax cut for C Corporations (most large Companies in the U.S. are C’s) from 35% to 15% or 20% i . Also, look for substantial changes to the repatriation of oversees profits rules from large companies. This alone should boost the economy by allowing companies like Apple and Google to bring their profits earned oversees back to the U.S. without getting killed on taxes — this will likely allow tens of billions of dollars to flow back to the U.S. economy.
Look for income tax rates to go down for individuals (to include earnings from Partnerships and S Corporations). The brackets could end up at 12%, 25%, and 33% ii — generally 20% lower than now. Capital gains rates should come down and the 3.8% surcharge on unearned income, passed as part of the Affordable Care Act, should be repealed.
All this should be a substantial boost to the economy in 2017 and 2018. What else will be on the agenda for the first 100 days? The list includes —
1. Repealing much (but not all) of the Affordable Care Act. This law has been a disappointment to many for various reasons, but several of the provisions are popular — look for them to stay. They will look for creative ways to save money in the system to include block grants to states for Medicaid (similar to how welfare was reformed in 96 ’ under Clinton).
2. A repeal of or a substantial change to Dodd – Frank, (the financial system overhaul passed in the aftermath of the 2008 financial crisis). This law has hurt banks and financial companies — its repeal would be a tr emendous boost to small and medium sized banks.
3. Immigration reform, or at least a discussion about major aspects to include building a wall and an accountability system for foreigners overstaying their Visa.
4. A sea change in energy policy to include nixing certain executive orders signed by Obama . Generally, under Trump, U.S. energy production will trend higher, spelling more profit for producers, and equipment makers but also setting the stage for disputes over pollution and land use.
Generally, we see a very aggressive agenda that will take on a lot in a short period of time. Some of this will likely be a substantial help economically, but some of it could cause volatility in the financial markets . Generally, we think the positives outweigh the risks for stocks this year. Higher growth should push equity prices higher. In 2016, GDP growth was approximately 1.6% iii — very anemic. The forecast for 2017 looks to be between 2% and 2.5% iv . This is still not the elusive 3% that is characteristic of a good economy, but an improvement nonetheless.
Of course, one of the implications of higher growth and rising wage inflation is less accommodative Fed monetary policy. We should except two or three Fed rate increases this year. This, coupled with higher growth, will almost certainly cause inflation to pick up to a rate of 2.5% v . Expect that to cause volatility in both the stock and bond market s at points throughout the year. Of the two, we are more concerned about the impact on th e bond market. Bonds serve a vital role of risk reduction and income in most people’s portfolios — we generally, don’t think of losing money on bonds but we need to be vigilant as interest rates move higher.
In foreign markets, we see a mixed bag. China and India should grow by 6% vi plus in their GDP. We think the Eurozone and Japan will barely squeak out 1% vii in growth. Except for certain emerging market economies and the U.S., much of the world is experiencing very low growth.
Over the short term, we are a li ttle concerned about the U.S. stock market being ahead of itself. We believe the market may likely take a breather before pushing higher this year. As of this writing, the DOW Jones Industrial average has still not closed above the elusive 20,000 mark — look for that to happen this year, but we may see 19,000 before we see 20,000. The market has been euphoric in the post – election period, maybe too much so. The hard work has yet to be done. As we get into the politics of repealing the ACA and other contentious issues, look for market volatility to increase. If we still feel positive about stocks at that time, that is the time to buy — a large dose of patience and the adage “buy low” should be our friend this year.
Longer term, the big question will be how long d oes the current expansion continue, and in 2018, do we get our first year of GDP growth in over 10 years? The answer to that question is still too far in the future to accurately know, but we feel good about that prospect from where we are sitting now.
First, after 8 years of loyal service , Susan Harris has retired. It is possible that she may be back periodically to help with projects but she is thinking of more leisurely pursuits that include sailing and RVing. We wish her all the best. Jennifer Duncan has been an integral part of our office for 10 years and has filled Susan’s position. We are certain she was the best person for the job. The search continues for Jennifer’ s replacement — hopefully more news to report on that at a later date.
We like to remind folks that financial, retirement, and estate planning is a marathon and not a sprint. Good planning requires patience. We do feel good about the apparent direction of the new Administration in most areas . We think it is smart to be tactical in our approach to short term volatility and to use periods of market weakness to take on risk . Make no mistake, we will be paying close attention as things develop this year and will do our best to exercise prudence and judgement in our approach.
Thank you for your continued business. We look forward to talking with you soon. We hope that everyone has a great Winter !