It’s still a bit early to say much, but our ardent publisher has asked for a take on Trumponomics and what the results of the election might mean to your personal finances. I think we can all probably agree with The Economist when it wrote in late November, “For the moment, the policy priorities of the Trump administration-in-waiting are a basket of unknowables.” To the extent that we can rely upon probability theory and early indications, we can make some pretty well-educated guesses about what could happen going forward. So here goes.
Campaign promises very often get sidelined by political realities once the candidate actually gets into office. However, tax cuts for the higher brackets and capital gains are likely to be early and easy victories for Trump given the Republican-controlled Congress. He has also indicated that he would like to do away completely with estate and gift taxes. On a note germane to this readership, congressional Republicans think that they are now more likely to be able to orchestrate a full replacement of the Affordable Care Act despite that fact that they lack the 60 votes needed to overcome a filibuster in the Senate. They would do that via a process called “budget reconciliation,” which permits a simple majority on tax and spending measures. The replacement, envisioned by Paul Ryan, would grant a tax credit to everybody based on age. Exactly how such changes will affect the demand for your services and reimbursement rates remains a question mark.
If your tax planning has been to assume that income tax and capital gains rates remain the same or go up over time, it is now time to reconsider the impact of declining rates. As we approach year end, deductions and exemptions are likely to mean more this year than they will next year. Even when rates are the same from one year to the next, income deferral has long been a tax saving maneuver suggested by tax practitioners. It takes on added significance this year.
As you probably know, the stock market dropped precipitously as the returns came in on election night but bounced back to hit new highs shortly after the election. The stock market’s wild post-election ride seems to indicate an expectation that a return to the fiscal policies of Reagan might be in store. The big story is in the rapid rise of government bond yields. The bond market clearly expects for there to be bigger deficits, ramped-up growth, and higher inflation. If the past is any indicator of the future, we can expect all of these to overshoot their targets – which could lead to our next recession.
The Economist points to three major concerns of a Trump administration using the Reagan playbook: 1) Financial instability (i.e., higher interest rates, defaults by emerging economies causing problems for banks at home); 2) A rapidly rising dollar that will make it difficult for the manufacturing sector to develop a current account surplus with our trading partners; and 3) The starting place (i.e., lower top tax brackets and higher inequality) that is much different than it was in the 80’s will make the potential benefits of a stimulus much smaller than we saw then. This could all spur a new round of uncertainty, which, I probably don’t need to remind you, markets hate.
Interestingly enough we have a new tool to monitor economic policy uncertainty in the form of an index. It was formulated by three economists from Northwestern, Stanford, and Chicago and shows that increased uncertainty goes hand in hand with lower growth. So despite the hoped-for stimulus promised by lower taxes and increased spending, there is enough uncertainty that sufficient growth is anything but a sure thing. The real question is where to look for the silver lining in these clouds.
If only the new administration is able to bring about infrastructure spending on projects with a high rate of return, the job market and the bond market will be delighted. The bond market would continue to fund the deficit without a huge rise in yields, which could lead to sustained growth and working Americans once again enjoying an improving living standard. If only he can negotiate a proper trade deal with China that will enforce free but fair trade, economies around the world will benefit. If only he can protect our shores without alienating our neighbors and partners, the economy needn’t suffer.
Other than the aforementioned tax planning, what can we do to contend with the new world that we all face in 2017? First of all, I point you back to last month’s article having to do with proactive risk controls in your portfolio that will even help make money in a volatile market while protecting capital. Just as importantly, we need to be alert for opportunities that this new environment brings. The financial and healthcare sectors could benefit from reduced regulation. Technology is likely to do well because firms that depend on technology have a strong incentive to invest despite significant uncertainties just in order to stay ahead of their competition. If the protectionist strategies for stronger national defense fomented in the campaign actually play out, companies that support our defense are likely to do well. All in all, bonds are likely to underperform stocks in 2017 and lower than historical rates of return of securities of all types can reasonably be expected. Closer attention to the shifts in the market is key. Let us know how we can be of service.
The stock market’s wild post-election ride seems to indicate an expectation that a return to the fiscal policies of Reagan might be in store.
Scott Neal is president of D. Scott Neal, Inc., a fee-only financial planning and investment advisory with offices in Lexington and Louisville. Questions and comments are welcome at 800.344.9098 or by email to scott@dsneal.com.