I hope you had a great weekend! Welcome to the world of President Trump!
LRPC’s Monday Morning Minute for this week, “Trump Shocker: Five Likely Changes Coming Soon” (presented below) comes to you courtesy of American Funds. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week. If you are short on time, try to take a look at each of the five major headings below.
Did you wake up on Wednesday morning and expect to hear “President-Elect Trump?” At least half of the country didn’t! What might be on President Trump’s initial agenda? Read on below to see what the experts from American Funds believe President Trump will tackle first.
Have a wonderful week!
Trump Shocker: Five Likely Changes Coming Soon
By: Matt Miller, American Funds
In this historic victory that shocked the political establishment and global financial markets alike, Donald J. Trump will become the 45th president of the United States.
In an uncanny echo of the Brexit outcome, millions of Americans frustrated with the country’s direction voted against the perceived status quo in the world’s wealthiest and most powerful democracy. Yet lack of clarity on how the president-elect actually will govern poses both risks and opportunities for investors.
Republican candidate Trump beat his Democratic opponent Hillary Clinton by a notable margin. Global stock markets were volatile, falling in Asia and then rallying in the U.S. on the view that Republican fiscal policies could provide meaningful stimulus to the economy. U.S. Treasuries slipped, the dollar was mixed against major currencies and gold rallied.
Now investors and international leaders must take his measure, and Americans will adjust to the style and tone of a self-proclaimed outsider in the White House. However, the Republican majority in both the House and the Senate means Trump stands a good chance of enacting much of his economic agenda. He could do that via the so-called budget reconciliation process, under which tax and spending changes can pass with a mere majority of the Senate, not 60 votes. Investors now spooked by Trump’s election may find themselves surprised next summer by the economic stimulus Trump’s Washington enacts.
While we expect market volatility to continue as investors adjust to the reality of a new balance of power in Washington, here are five key areas in which policy decisions could have an economic impact.
1. Infrastructure: More than just a wall
The president-elect has talked about an infrastructure plan of what could be at least $500 billion, based on his informal pledge to roughly “double” what his opponent campaigned on.
While many in the nation’s capital are skeptical, this effort may well include some version of a border wall intended to staunch the flow of immigrants across the southern border of the U.S., a centerpiece of his campaign. In theory, the U.S. could even give Mexico loan guarantees to borrow at very low interest rates to assist in its construction, thus making good on Trump’s promise to have Mexico “pay” for the wall. Such a huge project might come to be seen as a Keynesian-style jobs program on both sides of the border.
Meanwhile, the same drive that led Trump to put his name on skylines in New York and elsewhere seems likely to inspire the new president to embrace an infrastructure agenda that would leave his legacy imprinted on any number of new or repaired roads, bridges, tunnels, seaports, airports, sewer systems, electric grids and more. If a stimulus of the size he’s discussed were to be dispersed over a five-year time frame, it could add up to half a percentage point to gross domestic product annually over the period.
2. Taxes: Lower rates for corporations and workers
Those infrastructure projects could be partially paid for through a corporate tax overhaul. Any such deal would likely include a provision to repatriate the estimated $2 trillion of U.S. corporate earnings trapped overseas by taxing it on a one-time basis at a roughly 10% rate. This could entice companies to bring the cash back to the U.S.
Most Republicans and Democrats agree that the U.S. corporate tax code needs reform. That makes it a prime candidate for bipartisan agreement and a potent early chance for Trump to showcase his negotiating skills. During his campaign, he pledged to cut the top marginal corporate tax rate to 15% from 35%, which should have the desirable side effect of curbing inversions — transactions that allow a U.S. company to merge with an overseas firm and pay a lower tax rate in the latter’s country. This practice has become popular over the past several years, much to the dismay of policymakers.
Trump has also pledged to dramatically lower personal income tax rates. If Trump has his way in the reconciliation process, the resulting blueprint — which would also include substantial defense increases — would spell higher budget deficits in the near-term. More traditional Republican entitlement reformers, like Paul Ryan, will likely seek assurances from Trump that he’ll return to these long-terms concerns within a few years.
3. Trade: Considerable changes could be coming
A president has more unilateral power to make changes to current trade arrangements than is commonly understood. That means President-elect Trump could rewrite deals to be tougher on trade partners — or use the threat of U.S. withdrawal from existing deals as a negotiating ploy to force changes in areas he deems important. While the Washington establishment fears Trump will lead us into a destructive and recession-inducing trade war, that’s hardly guaranteed. It seems more likely that Trump would see his and the country’s interests better served by a posture that flexed some unused trade muscles to arrive at better terms at the margins.
In particular, Trump has pledged to revise the North American Free Trade Agreement, which was signed by his opponent’s husband, President Bill Clinton, in 1993. He would also kill the Trans-Pacific Partnership, a result that would hurt America’s prestige in the region. Finally, Trump has called for tougher rules on trade with China, who he says has taken advantage of U.S. trade negotiators for years. He could also attempt in various ways to crack down on U.S. firms that move jobs, plants or operations overseas.
4. Healthcare: Repeal and rebrand the ACA
Although Trump has been vague about his precise plans for health care, he has campaigned on repealing the Affordable Care Act (ACA). Most observers believe, however, that it would be politically disastrous to simply cancel coverage for the 20 million Americans who’ve gotten health coverage under the ACA. So it’s likely that the GOP plan to “repeal and replace” the law will ultimately be implemented as a kind of “repeal and rebrand” — i.e., some scaling back of subsidies and regulations Republicans find excessive while nonetheless holding the vast majority of current ACA beneficiaries harmless. During the transition there may be market jitters for hospital and health plans that depend on the ACA’s subsidies and related supports. In the end, however, they should be able to flourish even after a GOP revamp.
During his campaign, Trump also criticized high drug prices, saying the government needs to be a stronger negotiator with pharmaceutical firms. If he follows through, that could mean a push for the government to exert its pricing power through Medicare, Medicaid and its other programs. However, the GOP more broadly is not aligned with Trump on the idea of direct price negotiations, so the outcome for now remains unclear.
5. Looser fiscal policy: A boon for defense contractors?
Trump has called for major defense spending increases, which would probably include beefing up defensive homeland security as well as offensive capabilities. That could signal something of a reversal from the Obama administration, which allowed defense spending to decline. Of course, if growth for such expenditures picks back up, it would be welcome news to big defense contractors in industries like aerospace.
Over the long run, the U.S. economy is likely to remain one of the strongest globally no matter who resides in the White House. Nevertheless, the president has the power to execute policy changes that can move markets.
While these five areas are some of the most significant in which the president-elect hopes to make changes, he and the new Congress can affect the economy in other ways as well. For example, Trump has said he’ll roll back 2010’s Dodd-Frank financial regulation law. Trump has also said that he would pull out of the Paris climate deal and undo environmental regulations to promote fracking and the coal mining industry. That could have a negative impact on renewable energy companies and a positive one on fossil fuel firms. These steps would also be highly controversial.
In the end, a Trump administration means a significant shift in Washington policy for at least the next four years. That could worry markets initially as they wait to see how a Trump presidency actually takes shape.
About LRPC’s Monday Morning Minute
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
About Lawton Retirement Plan Consultants, LLC
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.