On November 8, 2016 an election was held to determine who will lead the country for the next four years. Leading up to the vote, numerous polls were conducted to gauge the mood of the American people and determine their thoughts on the future of our country. Some voters indicated their decision would be philosophical, a choice between conservative or liberal, more government or less government, political experience or business experience, establishment or anti-establishment, status quo or change. Others indicated that past misdeeds, character flaws, and personality deficiencies of one candidate or another would help them select the lesser of two evils.
In the end, over 59 million Americans voted for Donald Trump, allowing him to attain the 270 necessary electoral votes to become the next President of the United States. Along the way, Republicans handily secured control of the House of Representatives for two more years and narrowly retained control of the Senate. The results led to reactions from friends, neighbors, and coworkers that ranged from absolute euphoria to utter disgust.
Candidate Trump vs. President Trump:
During the campaign, candidate Trump’s message focused on voter discontent and the need for change. He vilified individuals, groups of people, and at times whole countries that he believed were responsible for America’s troubles. At times, his words were divisive and a few ideas seemed somewhat outlandish.
However, when he took the stage early Wednesday morning for his acceptance speech, President Trump’s message was quite different. He spoke of Republicans, Democrats, and Independents from across the nation coming together as one united people. He described his movement as one comprised of Americans from all races, religions, backgrounds, and beliefs, who wanted their government to serve the people, and serve the people he would. He told the world community that he would always put America’s interest first, but would deal fairly with everyone, all people, and all other nations. He would seek common ground, not hostility; partnership, not conflict.
The Financial Market Reaction:
Was his Wednesday morning speech a sign that President Trump will behave differently than Candidate Trump? While only words, the message was well received by the financial markets. The sharp selloff that had accelerated throughout the night as votes were tallied in Mr. Trump’s favor began to reverse. Between 2:00 a.m. and 7:00 a.m. losses were roughly cut in half and by the time markets closed at 4:00 p.m., domestic stocks and European stocks were in positive territory. The trend continued when Asian markets opened as gains spread across Japan, Hong Kong, and Australia.
While the one-day reaction was positive, it is by no means a trend. Over the weeks and months ahead, we will face many challenges and uncertainties. President Trump will need to form a Cabinet, put forth policy initiatives, and begin to mend fences with members of the House and Senate in order to pass legislation. It is likely that increased volatility will occur during this time.
Rising Interest Rates:
With the election behind us, the Federal Reserve has another obstacle to raising interest rates in its rearview mirror. As domestic stocks advanced on Wednesday, the interest rate on 10-year government bonds rose above 2% for the first time in months. In addition, the fixed income futures market is now pricing in an 80% chance of a Federal Reserve interest rate increase in December.
In 2017, the path for interest rates is less certain. Candidate Trump has been antagonistic toward the Federal Reserve and Fed Chair Janet Yellen. He has argued that super-low interest rates have artificially propped up a failing economy. He has accused the Fed of creating a “false economy” and doing “political things.” But short of rewriting the laws governing the Federal Reserve, it will not be easy for him to influence the board’s actions when he enters the Oval Office for the first time. Terms for the Board of Governors of the Federal Reserve System are for fourteen years and are staggered every two years. Therefore it will not be easy for President Trump to add like-minded individuals to the board. Even the Chair herself is protected for the near future, as her term will not expire until early 2018. As such, more than one or two interest rate hikes in 2017 is unlikely.
During his campaign, Candidate Trump proposed an across-the-board tax cut, especially for working and middle-income Americans “who will receive massive tax reduction.” While a huge tax cut may be difficult to implement, an increase is highly unlikely in 2017. As such, it may be beneficial for those in a high tax bracket to defer income and taxable gains, to the extent possible, through the end of 2016. We realize this will not be true for everyone, but those in a high tax bracket may see income taxed at a lower rate if they wait until 2017.
Candidate Trump also discussed tax reform while campaigning. The promise to eliminate special interest loopholes, and make our business tax rate more competitive to keep jobs in America is quite appealing. With both houses of Congress under Republican control, tax reform is likely to occur during his tenure in the White House. The final compromise is unlikely to look exactly like he laid out on the campaign trail, but is likely to include a reduction in the corporate tax rate, the elimination of carried interest exemption (a loophole that benefits hedge fund managers), and a one- time provision for corporations to bring foreign profits home at a reduced tax rate.
In his acceptance speech, President Trump spoke of fixing our inner cities and rebuilding our highways, bridges, tunnels, airports, schools and, hospitals. He discussed rebuilding our infrastructure and putting millions of our people to work as we rebuild it. While the campaign promise of $1 trillion dollars of spending is unlikely, the idea of infrastructure spending is popular with both Democrats and Republicans. As such, a bill may work its way through Congress during the first few months of his presidency.
The Affordable Care Act:
For those currently enrolled in a policy purchased on one of the health care exchanges, it is unlikely your policy will disappear any time soon. Although both President Trump and the Republicans in Congress oppose the Affordable Care Act, dismantling a piece of legislation that complicated will be time consuming. In addition, a true repeal and replace would require 60 votes in the Senate to avoid a filibuster.
While there is a lot President Trump and the Republicans can do through rule-making and small legislative changes to weaken the law and mold it to something they believe is more palatable, a complete repeal and replace is unlikely in the first few months of his presidency.
There are Three Branches of Government:
In closing, it is important to remember that our forefathers set up three branches of the government for a reason. The checks and balances are essential to ensure that any one branch of the government does not enjoy unlimited power. In spite of maintaining majorities in both the House and Senate, President Trump will not get everything he wants. There is a significant gap in what Candidate Trump has proposed and the agenda of many rank and file Republicans in Congress. As such, compromise will be necessary for any change to take place.
As the executive and legislative branches begin to compromise, the American people and the financial markets will have plenty of time to digest the new changes before they are implemented. We will continue to evaluate the new administration, its policies, the investment environment and how it will affect our clients and their financial wellbeing.
John S. Gullo, CFA, CFP®, CIMA®
Chief Investment Officer
Chief Operating Officer
This publication contains general information that is not suitable for everyone. All material presented is compiled from sources believed to be reliable. Accuracy, however, cannot be guaranteed. Further, the information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this publication will come to pass. Past performance may not be indicative of future results. All investments contain risk and may lose value. ©November 2016
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