Published in the November 23- December 6, 2016 issue of Morgan Hill Life
By Dan Newquist
Dan Newquist
After an exceptionally contentious presidential election cycle, Donald Trump was voted in as our nation’s 45th President.
While there were many reasons for why Donald Trump won, the overwhelming theme was that voters wanted change. As President-elect Trump prepares to take office to implement some of these changes, let’s take a look at where we are, what we might expect, and what we should do from an investment perspective.
Where Are We? Overall, President-elect Trump should be inheriting an economy and corporate environment that is in fairly good shape. The U.S. economy is growing and that growth has been accelerating during the past few quarters and is capable of springing ahead with some direction and clarity. The most recent quarter’s Gross Domestic Product was estimated at 2.9 percent (Source: Bureau of Economic Analysis), our manufacturing is expanding and unemployment is at 4.9 percent (Source: Bureau of Labor Statistics).
U.S. corporations are also in good condition. According to FactSet, with more than 85 percent of companies in the S&P 500 reporting earnings for the third quarter, corporate profits are expected to grow 2.7 percent versus Q3 2015. Improving corporate earnings is good for investors. Looking outside of the U.S. the International Monetary Fund is estimating that the global economy will grow by 3.1 percent in 2016 and they expect growth to pick up in 2017 to 3.4 percent.
What Can We Expect? When President-elect Trump takes office in January, his first 100 days will be key. Many of his campaign promises will take center stage and he will likely want to move his agenda forward very quickly. Our economy is already experiencing low to moderate growth and doesn’t appear to be on the verge of a recession, however it will behoove President-elect Trump to carefully moderate his agenda, especially related to trade, to dampen the potential of entering the economy into recession.
Mr. Trump outlined three keys to accelerate economic growth during his campaign, which may be good for investors. He focused on lower corporate tax rates, large scale fiscal stimulus via infrastructure spending and repatriation of corporate cash held overseas. All of these initiatives should put more money in the hands of consumers and allow businesses to invest more in growth or distribute that money to shareholders.
Regulation trends move like a pendulum toward one extreme until voters say enough. Given what Mr. Trump campaigned on, we would expect to see the pendulum to start swinging toward less regulation and less government involvement. That doesn’t mean a lack of government involvement or massive changes overnight, but the present trend toward greater regulation is most likely going to reverse course.
Since President-elect Trump is new to politics, there is a higher degree of policy uncertainty. Without an established voting record that comes from years of public service, we don’t know how conservative his views will be. Investors will be anxiously awaiting what policies will come first, how quickly they will be implemented and if they resemble what he campaigned on or something different. The challenge is that we don’t entirely know what to expect from him so preparing our minds for higher volatility is one way to ready ourselves for uncertainty that may be coming.
What Should We Do? Now that America has decided on a new president, should you decide to change our investment approach? Probably not, especially if you are using a diversified approach to money management. If you are properly diversified, the beauty is that not all of your investments are tied to one outcome and don’t require a Democrat or Republican in Washington for your investment approach to work.
This isn’t the time to let your political affiliation affect your investment decisions. Thrilled or not by the election results, the stock market has historically performed well under political harmony versus gridlock. In broad terms, from 1945 to 2015, when there was harmony (i.e., the same party controlled the Oval Office, House of Representatives and Senate — like we will have now), the stock market averaged a return of 15.4 percent versus 10.5 percent during periods of gridlock.
Finally, remember why you are investing. Most people invest money to help realize goals. Whether a Trump presidency creates opportunity or volatility, the alignment between your goals and risk tolerance remains a key factor in investment success. Presidents come and go, but your goals last much longer. Your portfolio should be built for the long term, and designed to help mitigate the regular volatility of investing in capital markets.
Dan Newquist, CFP®, AIF® is a Principal Investment Advisor Representative with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill. He can be reached at (408) 779-0699 or [email protected]. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.
