Augusta, GA — The political season has not just impacted social topics. It has also impacted the overall economy and stock market. That is why we chose to turn to Will Caywood, a financial advisor with the Fehrman Investment Group, to explain the ups and downs we have seen, and what we will possibly see going forward.
Before we jump into the election analysis and what the results mean, bring us up to speed on how things have been going so far this year. Through the first 3 quarters of the year, both the US stock market and bond market had performed pretty close to their historical averages being up 4-8% depending on the index. There was certainly some drama involved in getting there with the big selloff early in the year and the Brexit news in late June. Value stocks have outperformed growth stocks so far year to date and surprisingly to some, small and mid-cap stocks have outperformed larger company stocks.
How have the markets performed in the last month or so leading up to the election and since? It has been a very interesting (at least to people like me) to watch the markets move over the past few weeks. The last part of October and the first part of November we had 9 straight days where the S&P was down in a row. This is extremely rare and something that hadn’t happened since 1980. Many market experts assumed that this was due to Trump closing the gap on Clinton’s lead in the polls. On Monday, November 7th, the markets started an 8-day winning streak that lasted through Wednesday of this week. Many people are calling this a relief rally due to the election finally being over, but there are also some reasons to be optimistic on the economy under a Trump Presidency.
Looking forward now, you think there are 5 ways President Elect Trump could move the markets. The first way is with infrastructure. Infrastructure spending will be a key way that the economy could improve. Trump has talked about spending at least $500 billion on infrastructure which is a dramatic increase to what has been spent and much more than his opponent campaigned on. Many of the headlines have been about building a wall along the Mexico border and having Mexico pay for it. While some have been offended by the project or laughed at it, there are some benefits that could help the national GDP which would help us all. His infrastructure plans would also include repairing roads, bridges, tunnels, seaports, airports, sewer systems, electric grids and other things.
Part of the infrastructure spending could be paid for through a corporate tax overhaul. Part of the tax plan is to make it more advantageous for companies with US corporate earnings from overseas companies to bring their cash back to America. There is about 2 trillion dollars that could come back to the US under his plan that could be used in various ways. The US has one of the highest corporate tax rates in the world at 35% and Trump’s plan is to lower that to 15%. That tax rate cut would immediately be huge for workers, companies, and investors since the companies would pay less to the government in taxes and could spend money on hiring, research and development, and dividends to shareholders. There are also plans to lower the personal income tax rate as well.
Considerable changes could be coming in trade or how the US does business with the rest of the world. The president-elect has campaigned about how he’d change the trade deals that have been put in place with other countries. Many Washington establishment folks fear that this could lead us into problems or even a recession. In my opinion, Trump views trade deals with countries from more of a businessman perspective and less of a politician’s perspective. There is some risk in structuring deals this way, but there could be some great rewards if the policies are implemented effectively. There will definitely be more of a nationalist or isolationist approach to the trade deals that will be made.
Healthcare is what I think is the biggest wildcard going forward because I’m not sure there is a great answer in the short term. Trump campaigned on repealing and replacing the Affordable Care Act, but it is not something that can be done overnight since 20-30 million people have health coverage under the ACA. At the same time, the current system isn’t working to due huge rate increases year after year. My thought is that there will be a “repeal and rebranding” of Obamacare. I think that some of the subsidies and regulations within the ACA will be taken out or limited, but many of the people on the plan won’t see significant changes.
Looser Fiscal Policy implemented with a Trump president would mean increased defense spending which includes our military as well as our homeland security. Both of the presidential candidates actually said they would spend more than the current administration. With the increase in defense spending, I expect increased attention to be paid to terrorism and ways to prevent attacks before they are made. Many defense contractors and aerospace companies would stand to do well under a Trump presidency both with short term projects and longer term larger projects. Much of the current military is nearing the end of its useful like and I expect to see increased spending in these areas.
What sectors will do well and which will struggle? Three industries or sectors that we expect to do well are Defense, Infrastructure, and financials. We’ve touched on two of those already, but the financials are poised to do well due to less government regulation being imposed on them. Like many things, there was far too little regulation a decade ago, and the pendulum shifted to the other extreme where there is now too much regulation in many people’s opinions. Energy, especially alternative energy is a sector we think will struggle going forward. Also, technology and healthcare are both wildcards with so much uncertainty revolving around these sectors.
What do we see between now and the end of the year? As I mentioned in the beginning, there were 9 straight down days a few weeks ago in the markets followed by 7 straight up days so it is extremely difficult to time the market. I think that this volatility will continue through year end as we approach another Fed meeting where a rate increase is almost a foregone conclusion. My thought is that we’ll be higher at year end and that long-term investors will do very well in the next few years if the policy changes that are being proposed are implemented properly.