In a surprising victory, Donald Trump is now the president-elect. Along with the Trump win, the Republican Party retained the House and Senate. This sweep by the Republican Party will have a major impact on how the country is governed for at least the next two years. Although this election seemed to be more about social than economic issues, it is our responsibility to analyze the impact of a Trump Presidency on the markets and the economy. Although Mr. Trump’s true stance on many issues is not yet known, there are a few areas we believe the Republican Congress will try to address in the first year of his presidency.
First, we believe there will be a decrease in U.S. corporate tax rates. Mr. Trump has suggested lowering the rate from 35% to 15%. Lowering the tax rate should help make U.S. companies more competitive on the global stage and may slow the flow of jobs to other countries. It should also reduce the benefits of corporate tax inversions in which U.S corporations move their headquarters overseas. We would view this tax change as a positive for the stock markets and the economy.
Although this election seemed to be more about social than economic issues, it is our responsibility to analyze the impact of a Trump Presidency on the markets and the economy.
Second, we believe there will be a lowering of the repatriation tax rate. Estimates are that U.S. companies currently hold $2.5 trillion in cash overseas. This cash is subject to a 35% repatriation tax if a company wants to bring the money back to the United States. Mr. Trump has suggested lowering this rate to 10%. Lowering this tax rate will make it more economical for U.S. corporations to repatriate profits and should lead to a flow of capital into the United States. Barring any restrictions placed on the use of this cash, we would expect the balances to be invested back into the businesses or returned to shareholders in the form of dividends or stock buybacks. We think this is a policy change that is way overdue and would be very beneficial for shareholders.
Third, a Trump Presidency should have more pro-business policies compared to the current administration. This will start with the repeal of many of President Obama‘s executive orders. It should also result in less onerous regulations on businesses especially in the energy and financial sectors. Although less regulation is usually viewed as a positive for business, how they go about repealing or changing certain regulations will be very important.
Fourth, the Republican Congress will most likely repeal Obamacare. What it would be replaced with is anyone’s guess. This would have a major impact on the healthcare industry and will need to be followed carefully. The consequences of a change this size are very difficult to judge at this time.
Fifth, we believe that Mr. Trump will have a more aggressive fiscal policy towards growth. Mr. Trump often cites his experience as a real estate developer and has promised to radically increase spending on public infrastructure. This could result in job creation, but it remains to be seen how Mr. Trump plans to pay for it. The plan could increase deficits and lead to higher inflation and interest rates.
Finally, we may see some major changes at the Federal Reserve. Mr. Trump has not been bashful in discussing his displeasure with current Fed Chairwoman Janet Yellen. We would not be surprised if she resigns before her term ends in 2018. At a minimum, President Trump would be responsible for appointing two members to fill seats that are currently unoccupied. These changes could have a material impact on current Fed policy and interest rates. The impact and possible unintended consequences will need to be monitored carefully.
Our view going into the election was that it was a volatile environment filled with uncertainty. We focused our equity positions in what we felt were top quality companies with solid balance sheets and strong cash flow that could adapt and succeed in an ever changing environment. For balanced accounts, we utilized investment grade bonds with shorter maturities so we could maintain flexibility in this low interest rate environment. We also were content to hold some cash. There is a tremendous amount of uncertainty around the direction and execution of Mr. Trump’s plan. We will continue to implement an investment strategy of quality and flexibility as we expect more volatility as Mr. Trump’s plan becomes more visible.
Please do not hesitate to give us a call if you would like to discuss in more detail.