Post Election Update

Global markets initially reacted negatively on the news of Donald Trump’s election as our 45th President of the United States. Asian stocks, European stocks, and U.S. stock market futures declined sharply in the early hours of the day on Wednesday. However, by the time the U.S. stock market opened, the losses had reversed, and by the end of the day, stocks were up nicely and global bond yields had moved higher.  It’s interesting how, unlike the Brexit shock in June which lasted about four days, the Trump surprise win was only negative for just several hours before stocks rallied.

(Photos: Courtesy GOP.org, Democrats.org)

Predicting what effect President Trump will have on your finances for the next four years is nearly impossible, but we wanted to share some of our thoughts.

Wednesday’s positive market reaction seemed optimistic about a President Trump who is friendly to American business, facilitating pro-growth policies and fewer regulations. Bank stocks rose on the hopes of a cut in regulations and we saw pharmaceutical stocks jump as the threat of price controls appears to have gone away.  Long-term U.S. Treasury bond yields were sharply higher on expectations of larger federal spending producing higher future U.S. inflation.

Although Republicans took the White House and will hold Congressional majorities in both the House and Senate, President Trump will likely face significant roadblocks with aspects of the agenda he laid out during his campaign. Mr. Trump talked about plans for big spending on infrastructure, repealing the Affordable Care Act (better known as Obamacare), and re-negotiating our existing trade agreements. We think it is unlikely Congressional Republicans will be willing to write legislation that creates much larger federal deficits.  Also, we don’t believe Congress will repeal existing legislation without offering good replacements.

Turning to taxes, Mr. Trump’s plan calls for simplification and lower taxes across the board, which could benefit the U.S. economy.  His plan would lower the corporate tax rate to 15%, increase the standard deduction, cap itemized deductions, repeal the alternative minimum tax (AMT), repeal the estate tax, and leave the capital gains tax the same.  He has suggested consolidating individual tax rates into three brackets (from the current seven): 12% up to $75,000, 25% up to $225,000, and 33% after that (amounts shown are for a married couple filing joint). Of course, these are simply campaign proposals.  Any serious potential changes to the U.S. tax code wouldn’t emerge until later next year, at the earliest.

Where do we go from here? This election has been a healthy reminder that politics can be unpredictable. Long-term tax planning must be done with a good degree of humility – we do not know if today’s tax environment will be the same long-term. Uncertainty, whether about the election or something else, could produce more volatility like we saw on Wednesday, but we cannot predict the timing of it.

We continue to recommend sticking with your investment plan to hold a diversified mix of investments and to rebalance regularly to your target allocation – which is set based on your tolerance for risk and individual goals. It’s worth highlighting research done by the investment firm Vanguard, which has shown that stock market returns under Democratic and Republican administrations are virtually indistinguishable (based on data from 1853-2016). Historical average annual returns were equal regardless of which party was in office. We do not recommend any immediate changes as a result of the election.

As always, feel free to give us a call to discuss this, or anything else related to your finances.