In the aftermath of the recent election, many people have been concerned about their stock and bond portfolios, unsure of how a Trump presidency will affect these markets. Although the markets looked like they were going to go into the ground after the Trump win on the morning of the 9th, they have since exhibited just opposite, or at least so far, though bonds are under pressure. We don’t know what the next four years will be like for certain, but here is how Trump’s victory could affect your portfolio:
As you may know, when interest rates rise, bond prices fall. Interest rates are rising for two reasons. First, they are discounting the effect of a potential trade war and tariffs, especially with major trading partners like China and Japan. The net impact of this trade war would be that these two trading partners, who hold significant amounts of US debt, would stop buying our US treasury bills, notes and bonds. Without these buyers, rates would have to rise on US debt and as yields on all classes of bonds are pegged to Treasury bond yields, the impact would be lower bond prices and higher yields across the board. The second reason, is the potential for Trump following through with his campaign promises. He has said that he’ll increase infrastructure spending while concurrently cutting taxes. The fear is that further deficit spending along with likely wage increases are also signaling inflation. What this means for bonds in the short term is that there will likely be a continued pressure on bond prices as interest rates rise and the market readjusts to the evolving economic landscape. What this means for stocks is not so clear. While rising rates over the long term typically dampen upward stock movements, stock prices can often rise in initial period of rising rates. We may have already seen the bulk of the rise in rates, and the rise of the stock market, until some policy initiatives actually get inked and come closer to fruition. In that respect a trading range may develop with rates peaking very soon as well as the stock averages as a wait and see attitude takes hold after this near term period of adjustment.
Corporate Tax Cuts
Corporate tax cuts and certain initiatives promised in energy and infrastructure may help to choose specific winners in the stock market. The promise to cut the top corporate tax rate from 35% to 15% may make small and midsize businesses more prone to make outlays on spending that has been deferred through the last four years of the Obama administration. The result could be that we see business spending finally fulfill the long predicted spending cycle to replace property plant and equipment. Still, all this depends on the House GOP and what cuts can be agreed upon. There is also hope that middle-income taxpayers and small business owners will benefit from these likely changes in the corporate tax structure, further encouraging consumer spending.
Perhaps the biggest uncertainty we face is that the global alignment of the economy is in jeopardy of being replaced by a regional and national economy. While this may have a positive effect for Trump’s constituency in employment for blue collar workers, the United States is currently at the center of a US dollar based global economy. The inward looking protectionist nature of the Trump campaign has caused an anxious state among our trading partners, which may undermine the foundations of this global economy. Though international demand for dollars is still high, and the dollar is still seen as a reliable store of value both domestically and abroad, an unpredictable foreign policy can undermine that confidence. Ultimately, the state of America’s global relationships is uncertain, with the possibility of foreign governments looking more urgently for an alternative, and being less willing to center their transactions on the US dollar.
If you would like to learn more or receive specific advice about your portfolio in this changing economic environment, please give us a call at (860) 674-1999 or email us at firstname.lastname@example.org. We would be happy to conduct an initial review of your portfolio, at no cost at your convenience.