Market Commentary, 11/11/16

Late Tuesday, when it appeared that Trump had won Florida and that he was heading for wins in North Carolina and Ohio, Dow Jones futures went into a free-fall, at one point being down 800, implying that the Dow would drop 800 points when the market opened on Wednesday. This wasn’t an issue of market fundamentals; rather, it was demonstration that the market dislikes uncertainty and hates surprises. And by midnight Tuesday it was clear that a surprise of historic proportion was in the making.

But to the amazement of almost everyone, on Wednesday stocks soared and the Dow closed up 257. The advance continued Thursday with the Dow closing up 219, i.e., 476 or 2.6% in two days. To put this in perspective, in the two days following the nine presidential elections before this one, the market was down 1.28% on average.

After market close yesterday, a big question was whether or not the market would give up all or part of the Wednesday and Thursday gains. The fact that the Dow closed up 40 today was significant, at least in the near term, because to some degree it indicates the gains Wednesday and Thursday were more than emotional response to the election.

Some are contributing this unusual market action to President-Elect Trump’s measured and relatively restrained acceptance speech.

That said, recent market action shouldn’t remove all concern about potential volatility. The market still dislikes uncertainty and many believe Trump is uncertainty on steroids.

Here is a summary of the changes Trump outlined on the campaign trail, all of which will bear on the capital markets.

Taxes: Currently there are seven tax brackets (rates) for individuals or families with the highest rate being 39.6% plus an additional 3.8% ObamaCare tax for the highest earners.
As of now, Trump’s proposal calls for three tax rates, with the highest being 33%, and no ObamaCare tax. Most people’s tax bills will fall although low-income families that haven’t paid any income tax for several years will likely start paying some tax.

It may seem that reducing taxes would decrease revenue to the US Treasury, which feels counter-intuitive with our national debt at $20 trillion. In fact, the nay-sayers tell us the national debt will grow substantially and while it may increase in the short term, in the long term the historical record indicates otherwise. In his 1963 State of the Union address (01/14/1960) President John Kennedy pointed out that, “America has enjoyed 22 months of uninterrupted economic recovery. But recovery is not enough … one step, above all, is essential – the enactment this year of a substantial reduction … in Federal income taxes.” Congress did reduce taxes and the economy did start performing better. The same thing happened when Ronald Reagan reduced taxes and when George W. Bush reduced taxes, with the highest rate dropping from 39.6% to 35%, the top earners actually paid more tax than in the early 60’s when the top rate was 90%. (This is because the Reagan and Bush tax bills eliminated the exceptions, deductions and carve-outs that had been available to the highest earning tax payers.)

Relative to corporate income tax, currently the first $50,000 of income is taxed at 15% and income over $50,000 is taxed at 35%, 38.9% which is the third highest corporate rate in the world (the United Arab Emirates rate is 55% and Puerto Rico’s rate is 39%). Trump says he will reduce the corporate rate to a flat 15%.

Jobs: Trump has promised to bring jobs back home, notably from Mexico and China, and he’s promised to renegotiate trade deals and to use tariffs so that American companies will make more products at home. He also promised to rebuild America’s infrastructure and in fact, said in his victory speech, “We will rebuild our infrastructure, which will become second to none.”

These measures should boost growth and provide new jobs.

The Fed: Trump himself has warned that the stock market is in a “big, fat, ugly bubble,” and he has been ardent about replacing Janet Yellen as Fed Chairperson (but her term doesn’t end until February 2018).

Health care: Goodbye, Obamacare. Trump campaigned to scrap it and replace it with a more “free market” plan that allows insurers to sell policies across state lines. He says he’ll work with a Republican Congress to finalize details and he wants to allow those who buy health coverage outside of their jobs to deduct their premium costs.

College: Trump vows to hold colleges accountable if they don’t lower tuition and he has threatened to take away the tax-exempt status of college endowments. He also wants to forgive student loan debt after 15 years of full payments instead of 20.

Child care: Making child care affordable was a big pledge of both Trump and Clinton. Trump has proposed letting parents deduct child care costs up to the average in their state for their children’s age. He also wants to let new mothers six weeks of maternity leave where they can collect unemployment payments.

Retirement: Don’t expect Social Security to change under President Trump. He didn’t call for any tweaks on the campaign trail.

Growth: Trump’s main proposals to hypercharge economic growth are large tax cuts, scaling back regulations (including Obamacare) and changing U.S. trade relationships. He and his economic team argue that these policies will stimulate growth. The majority of Wall Street experts think they could lead to a recession (these are the same “experts” that as late as Tuesday afternoon were certain of an overwhelming Clinton victory).

The summary statement is that in the long term, possibly as early as fall 2017, the stock market should perform very well. In the months following his inauguration Trump will likely remove various artificial stock market drivers (e.g., Fed-driven, low interest rates). If so, and given that we’re 7½ years into a bull market (albeit with quite a lot of volatility) we may see significant volatility and a significant stock market pull back or correction.

Wayne Copelin, CFP®
President, Copelin Financial Advisors, Inc.
514 Brooks Street
Sugar Land, TX 77478
Phone (281) 240-2902
Fax: (281) 240-2856
sugarlandfinancialadvisors.com

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