MARKET COMMENTARY

A Trump Presidency: What Are the Implications for the Market and Your Portfolio?

Conference Call Summary and Replay

11.17.2016 - Ronald J. Sanchez

While we continue to assess the broader implications of a Trump presidency, our investment team leaders offered their preliminary observations during a conference call on November 14. 

Listen to the call replay here. Below is a summary of the key takeaways.

OVERVIEW
Trump’s ‘America First’ Platform: Weighing the Pros and Cons
Ronald J. Sanchez, Chief Investment Officer

In the months leading up to the elections, we maintained that the underpinnings of the US economy were strong and that our slow-but-steady economic expansion was likely to continue. The elections have strengthened that view.

  • Trump’s pro-growth policies could be favorable for economic growth. They include tax cuts for individuals and corporations, a special tax holiday for repatriated funds, an increase in infrastructure spending and the easing of some government regulations.
  • They also appear to be aligning more closely with the GOP’s traditional playbook, which could improve the odds of legislative approval and implementation in 2017.
  • On the other hand, Trump’s stance on international trade and immigration could have serious unintended consequences, possibly cancelling out the positive influence of other policies. 
  • Any meaningful contributions to growth will take time to percolate through the US economy, possibly gaining traction toward the end of 2017 or early 2018.
Advice for investors: As always, we are encouraging investors to remain disciplined and stay in the market. Don’t chase bond yields or equity market performance. 

EQUITIES
Potential Winners: Tech, Financials, Industrials and Consumer Cyclicals
Carin L. Pai, Director of Equity Strategy

Recent market performance reflects high expectations for a Trump presidency and a Republican-controlled Congress. But determining how much economic growth might be generated by new presidential policies or legislation will take time.


  • Inflation and gradually rising rates are likely to benefit economically sensitive areas of the market such as financials, industrials and consumer cyclicals.
  • Conversely, this rotation is likely to work against sectors that rely more heavily on low rates, such as telecom and utilities (which are often viewed as proxies for the bond market because of their emphasis on paying dividends). The markets have quickly started to price in this rotation, however, and will likely consolidate some gains as the fundamentals need to catch up with growth expectations.
  • The healthcare sector, which has been weighed down by the prospect of tougher regulations and stricter price controls under a Democratic president, saw a relief rally after the elections. Biotech and managed care companies rebounded strongly. But volume-driven businesses such as hospitals could be negatively impacted by Republican-style healthcare reforms.
  • The tech sector, which sold off on fears about protectionism, could be especially well positioned to benefit from the repatriation of offshore cash, a pick-up in business spending as the result of lower taxes, and a boost in infrastructure spending (which would include IT infrastructure). Areas we are focusing on include internet security, cloud computing and social media.
  • We are incrementally more positive on the cyclical areas, but given the strong move of cyclicals after the election, attractive valuations may be limited to individual securities rather than entire sectors.
  • The potential benefits of tax cuts have to be balanced with a strong dollar and potential negative effects of protectionism.
Our approach: We are reassessing policy developments as they take shape, incorporating them into our investment process. That includes a top-down view of the economy and bottom-up view of corporate fundamentals.

FIXED INCOME
When Rates Rise, Short-Term Bonds Offer Some Advantages
Jeff MacDonald, Director of Fixed Income Strategy

We believe that investors who have been disciplined around interest rate risk, keeping bond maturities short and duration levels low, and have not been chasing yield in a fully valued marketplace, are going to be rewarded for that discipline over the coming quarters. As short-term bonds mature, we expect to see opportunities to reinvest at higher prevailing rates.


  • Wage pressure, inflation and more government borrowing at the federal level means we are probably moving into a higher-rate environment. We expect a 25-basis-point hike in the federal funds rate at the December FOMC meeting and we will be watching the Fed closely for any indication of an accelerated timeline for tightening given the prospects for policy changes in Washington.
  • Municipal bonds could lose some of their appeal versus taxable bonds if tax reform happens. But a combination of rising rates and a flurry of new municipal bond issuance means that muni investors could still see new potential opportunities to increase tax-advantaged income.
  • As the market adjusts to new presidential policies, we expect inflation to rise and the yield curve to steepen (with yields on longer-maturity bonds rising faster than yields on shorter-maturity bonds). This trend should continue as long as the FOMC’s forward guidance doesn’t become more hawkish.
Structural changes? President-elect Trump has been critical of the Federal Reserve throughout his campaign and market participants will be watching closely to see what changes in personnel he will initiate. Trump could fill two open seats on the FOMC by nominating candidates for confirmation by the Senate. In 2018 he will also have the opportunity to replace both Fed Chair Yellen and Vice Chair Fischer when their terms expire. Many analysts expect this to happen. 

TAX REFORM
Broad Implications for Income Tax Deductions, Capital Gains, Estate Tax
Craig Richards, Director of Tax Services and Strategy

Trump has proposed trimming the number of personal income tax brackets from seven to three, with a maximum rate of 33%. We think Congress has an appetite for tax reform and has the public support. But tax cuts could face hurdles: Fiscal conservatives within the GOP could insist on seeing an equal amount of revenue to offset those gaps. And Senate Republicans still don’t have the 60 votes necessary to avoid a Democratic filibuster.


  • Itemized deductions would be capped at $200,000 for joint filers and $100,000 for single filers. This could affect high-income earners disproportionately. In anticipation of these possible changes, we are advising many of our clients to look for ways to postpone income and accelerate tax deductions. Some of the techniques they have been considering include holding off on selling appreciated property or exercising stock options while accelerating payments on mortgage interest, medical expenses and charitable contributions.
  • The repeal of Obamacare could eliminate the current 3.8% net investment income tax for certain individuals as well as the 0.9% Medicare hospital insurance tax.
  • Taxes on long-term capital gains and qualified dividends could be capped at 20% under Trump’s plan. The blueprint proposed by the House GOP would tax gains at ordinary rates with a 50% exclusion (50% of the top rate of 33%, which works out to 16.5%).
Repealing the estate tax: Trump and the GOP have both expressed support for repealing the estate tax, now at 40% with a $5.45 million exclusion. But Trump’s plan calls for a capital gains tax on estate assets over $10 million.

This communication is intended solely to provide general information. The information and opinions stated are as of November 17, 2016, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.


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