By: Dividend Sensei
Now that the world has come to terms with the surprising results on November 8ths election, many people are wondering what lies in store for the US economy under a Trump administration and GOP dominated Congress and Supreme Court. While such speculation is inherently difficult there are a few likely things that we can likely expect in 2017 and 2018 under the new regime.
All but certain
Tax reform: Trump made a big deal about how he plans to restart America’s economic growth with large, and broad ranging tax cuts.
Trump’s campaign tax plan calls for cuts across all income brackets, which the tax policy center’s analysis concluded would lower taxes by $24.5 trillion over the next 20 years, if fully implemented. The benefits would vary by current tax bracket, with most middle class people saving 4.9% of after tax income, the average tax payer saving 7%, and the top 0.1% saving 19%.
The specifics of what Trump wants to do with income taxes is as such:
- Collapse the current seven tax brackets, which range from 10 to 39.6 percent, into three brackets of 10, 20, and 25 percent
Increase the standard deduction to $25,000for single filers and $50,000 for joint filers in 2015, indexed for inflation thereafter
- Tax capital gains and dividends at a max of 20%
In terms of Corporate taxes, Trump’s plans are equally bold, when it comes to reducing government revenue.
Repeal most tax breaks for businesses
Reduce the corporate tax rate to 15 percent
Impose up to a 10 percent deemed repatriation tax on the accumulated profits of foreign subsidiaries of US companies on the effective date of the proposal, payable over 10 years.
- All future foreign profits will be taxed at 10% as they are earned (no more hoarding cash overseas)
Of course it is highly unlikely that Trump will get everything he wants, if for no other reason than there is a strong block of Senators and Congressman that will be worried about how such cuts could more than double the national debt over time. However, with 52 seats in the Senate, while Democrats will retain the ability to filibuster, the GOP congress will still be able to pass the majority of whatever combinations/alterations of Trump’s plan they want, via the reconciliation budgetary process (which requires a simple majority vote).
Deregulation: Trump was very clear that he would attempt to accelerate growth by removing burdensome (but what some consider necessary) regulations, including numerous recent EPA decrees, and certain aspects of the Dodd-Frank banking regulations passed in the aftermath of the financial crisis.
This has the potential to vastly increase profits for financial companies, such as banks, and insurance providers, if only because tax cuts, and trump’s other major economic initiative are likely to result in faster economic growth, inflation, and thus higher long-term interest rates (which means higher net margin spreads for financial firms).
Infrastructure spending/stimulus: Trump has called for $500 billion in spending on new (or upgraded/fixed) airports, roads, and bridges, and $1 trillion in spending over the next decade. This has led to construction and basic materials related stocks such as Caterpillar (CAT), and US Steel (X) rallying strongly in anticipation of the coming construction boom.
Of course the obvious question is where is that money going to come from. While interest rates are still historically cheap, the market is already pricing in rising rates, (via the recent bond rout) and so borrowing this much money won’t come nearly as cheaply as in recent years. Then there’s the fact that the same conservative GOP faction that is likely to prevent Trump getting his full tax policy through (due to deficit concerns) could also try to limit how much infrastructure spending Congress is willing to approve. After all, the Republican Congress has spent the last few years claiming that President Obama’s “shovel ready” stimulus was a failure, and thus might be opposed to the very notion on ideological grounds.
Trade restrictions/tariffs: Trump has stated that he wants to renegotiate NAFTA, which both Canada and Mexico’s leaders have indicated they are willing to do. The concern is that should negotiations fail to “improve” the current agreement, Tariffs with both nations could greatly slow, resulting in sharply higher domestic prices for goods currently imported from Canada and Mexico.
Similarly Trump has called China a currency manipulator and said he will impose tariffs up to 45% on Chinese goods. Not only has Beijing said that it would retaliate against such acts (with tariffs of its own), but such a trade war would surely lead to higher inflation, and commensurate interest rates, would could result in a US recession (which is actually the current consensus among economists).
History does indeed show that trade wars can be disastrous as the last effort to do something similar to what Trump is proposing was the Smoot-Hawley Tariff of 1930. This raised prices on over 20,000 imported goods from around the world, and resulted in a global trade war that saw US exports collapse, helping to bring about the Great Depression.
However, I should note, that the stock market rally since Trump’s surprise win on election night, has been as a result of his talking up his fiscal stimulus plan (tax cuts and infrastructure spending) and placing less emphasis on incendiary trade/immigration plans.
What it means for your portfolio
At the end of the day I’m a strict believer that the US government doesn’t control the economy, and thus it’s a mistake to try to time the market, or change your portfolio based on who does or doesn’t win office.
That being said, the likely effects of a Trump administration’s policies should lead to higher corporate earnings growth and rising interest rates over time. As a student of market history I know that these countervailing trends make short-term prediction of the market’s (but especially individual companies), highly uncertain. What I can tell you is that the market is likely to continue its long-term climb higher, and so staying invested in quality dividend growth stocks, and allowing the power of hyper-compounding to work for you as long as possible will remain your best bet for achieving long-term exponentially growing income and wealth.
Which is why I recommend that all investors maintain a sizable watch list of quality dividend growth stocks and take advantage of the fact that, no matter what the market is doing , something is always on sale.