It's Trump. Now What?
Donald Trump will be the next President of the United States. Whether you are elated or devastated by Trump’s surprising victory on Tuesday, it is time to get past the politics and do the work of analyzing the implications of a Trump presidency for the economy and your own investments. As we begin, let me first reiterate our perspective on politics, predictions, and investing. We have said many times over the past few months that the economy and the business cycle are far more important than the presidential election. Yes, government policy matters, but not nearly as much as the pundits and politicians would like you to believe. The president does not ‘control’ the economy and politicians often take credit and place blame on economic results that they actually have little to do with. As a result, making investment decisions based on a party preference, or expected political outcome can be dangerous.
Consider for example the events of this week. The market rallied significantly on Monday and Tuesday, we were told, due to Clinton leading in the polls going into the final days of the election. Over and over we were told that a Trump victory would result in a market crash, a prediction repeated so frequently that it became conventional wisdom. Contrary to those predictions, not only did Trump win the election but the market also rallied on Trump’s victory and the Dow notched its best week in 5 years, reaching a record high. Those that went to cash or traded on the expectations of the pundits made terrible investment decisions. The truth is that no one knows what will happen and the best approach is to remain disciplined with your financial plan, focusing on fundamentals.
I believe that one of the reasons for the market rally this week was that investors could get past the drama of the election and simply look at the economy, and there we continue to see positive signs. To name just a few statistics, 3rd Quarter GDP growth rose to a robust 2.9%, wages are rising faster than before the recession, and consumers have the strongest balance sheets in decades. Things are not nearly as dire as either candidate communicated.
It is with this perspective we come to Trump’s actual economic policies. Trump has campaigned on a platform to create a “pro-growth tax plan, new modern regulatory framework, America first trade policy, an unleased America energy policy, and the penny plan”. While there are still few details, here is what we can expect to be presented for each of these initiatives:
Pro-Growth Tax Plan
When it comes to taxes remember that revenue and spending must pass through the House of Representatives, so look for the words of House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady, as much as the words of President Trump. The key changes that Republicans are proposing include significant corporate tax changes to ‘bring home’ billions of dollars of US Corporate dollars ‘stranded’ overseas due to high corporate tax rates in the US and repeal the estate tax in favor of taxing capital gains. Further, while short on specifics, there is talk of major changes to the US tax code targeted at dramatically simplifying the tax code and reducing the tax burden on corporations and the middle class. Overall, the changes could represent a significant positive change to the economy.
New Regulatory Framework
While Trump has not shared what specific regulation he believes is strangling US business, the concept of reducing regulation is, at least in theory, a positive for the economy. First, Obamacare will be repealed and replaced, but with what? Next Dodd-Frank will likely be repealed, but it’s not clear what regulation will remain in place.
America First Trade Policy
Trump's policies related to trade are the most controversial and concerning from an economic perspective, and a significant departure from the trend toward free trade and globalization that has dominated the post-World War II economy. Trump has been particularly critical of the North America Free Trade Agreement, China’s entry into the World Trade Organization, and the Trans-Pacific Partnership. The business community generally agrees that lower trade barriers result in greater competition, lower costs, and greater growth in the long term. Yet again, however, it is unclear what specific changes Trump intends to make in this area.
Unleased America Energy Policy
When Trump speaks of unleashing America’s energy policy the implication is that he would like to reduce the burden of Obama’s environmental regulation on America’s coal and oil industry. To many, this is an environmental concern, and once again, we lack specifics from Trump on exactly what regulations would stay in place.
The Penny Plan
The Penny plan is an often-touted solution to the federal budget deficit that targets a one percent (one penny per dollar) reduction in government spending each year until the budget is balanced. The plan has its variations and Trump's version exempts entitlement spending (like social security) and defense spending. The fundamental problem with Trump’s penny plan proposal is that Paul Ryan has historically been opposed to the penny plan, and once again, budget bills start in the House of Representatives. We will see if the penny plan comes to fruition, but I suspect we will end up with a traditional budget battle.
In summary, we will need to see what policies Donald Trump actually implements before we will know what impact they will have on the economy. Trump is still light on specifics. Many of his pro-growth policies could help stimulate the economy, while his stance on free trade could hurt US corporations and slow global growth. Remember, however, that we do not elect a king in America. In order to make a substantive change in America Trump must go through the legislative process, which means that he will need Congress to agree. The result is that change will likely come slowly and the final laws will be a compromise of positions among multiple constituents. Meanwhile, the economy and the business cycle remain the focus for us as investors.
"Clinton and Trump in final swing-state blitz." Financial Times. 2016. https://www.ft.com/content/1b9d6224-a515-11e6-8898-79a99e2a4de6.
Zitzewitz, Eric. "Column: The stock market doesn’t like the idea of a Trump presidency." PBS Newshour. Nov. 7, 2016. http://www.pbs.org/newshour/making-sense/column-stock-market-doesnt-like-idea-trump-presidency/.
"Economy." Trump Pence." 2016. https://www.donaldjtrump.com/policies/economy.
"TRUMP DELIVERS SPEECH ON JOBS AT NEW YORK ECONOMIC CLUB." Trump Pence." Sept. 15, 2016. https://www.donaldjtrump.com/press-releases/trump-delivers-speech-on-jobs-at-new-york-economic-club.