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Happy 2017. I’m back after a break from blogging and social media – since the Trump election. I was extremely disappointed with the results of the election and how Trump won. The entire election process is disturbing.
I spent some time thinking about how I can make an impact and I will continue to explore options and take the steps I can. Right now, I will focus on Socially Responsible Investing – community investing and shareholder advocacy.
Any change of president, especially with changing political parties, brings with it some industries will do better and those that will not do as well as they previously had. In addition, with Republicans in control of the White House and both houses of Congress, there will most likely be major tax reform in 2017.
POSSIBLE TAX REFORM
Trump and the House Republicans have made their tax plans public. There are some differences, but many areas align. It can be useful to look at this in preparing for the possible changes.
Both proposals would simplify the tax brackets, from the current 7 tiers of tax rates, down to just three: 12%, 25%, and a top rate of 33% that kicks in at $225,000 (for married couples, or $112,500 for individuals). Both proposals would still keep preferential rates for capital gains and qualified dividends, although President Trump would retain the current 3 brackets (0%, 15%, and 20%), while the House GOP would simply make the rates 50% of the ordinary tax bracket (which means investment income would be taxed at 6%, 12.5%, and 16.5%).
However, when it comes to deductions, the proposals diverge, with the House GOP suggesting the elimination of virtually all individual tax deductions except the mortgage and charitable deductions (paired with an expanded standard deduction), while President Trump would keep all the current itemized deduction rules, but cap itemized deductions (at $100,000 for individuals, or $200,000 for married couples) while also expanding the standard deduction even more (so only a moderate subset of people between the standard deduction and the cap would ever itemize at all).
Both want corporate taxes reduced to 10 to 15% and estate taxes eliminates. Estate taxes currently only affect estates with more than over $10 million. Trump would like to enact a one-time repatriation tax holiday at a 10% rate. This would allow corporate money to return to the US to be invested or paid to shareholders.
Given the differences, it remains to be seen what the tax code will look like. In addition to the differences, the Democrats still retain the ability to filibuster legislation, which will further limit the ability of Republicans to engage in permanent tax reform without compromising some concessions to Democrats. Or alternatively, the Republicans could ultimately pass individual tax reform as budget reconciliation legislation.
TAX CONCLUSION
For most Americans, who earn under $400,000 per year, the tax changes will have very little effect. In evaluating our clients, we found that most will have slightly lower taxes with only a few experiencing higher taxes.
The big effect of these possible changes will significantly help people earning over $400,000 per year, with very large inheritances, and for corporations. The increased standard deduction will mean that for most people there will be no federal tax benefit in charitable contributions.
Unless there are significant government spending reductions, these tax plans will balloon the deficit. Trump is proposing infrastructure spending and increased defense spending. That may bring some republicans, who support balanced budgets, to oppose the tax plan. I expect that some of these changes will be implemented but probably not all.
INVESTMENTS
Here are some industries and individual companies that should do well under a Trump administration.
- Apple (AAPL) should do well if Trump’s tax plan reduces corporate tax rate to 15% from 35%. The one time repatriation would allow Apple to move some of its $250 Billion back which would be a boom for shareholders. General Electric (GE) and other large multinational companies would equally benefit.
- The GEO Group (GEO) and Correction Corp of America (CXW) operate private prisons which could benefit from increased detentions due to a potential illegal immigration crackdown.
- Fossil fuel and mining companies, such as ExxonMobil (XOM), Kinder Morgan (KMP), and Freeport-McMoRan (FCX) could have a good four years because of reduced regulation and a weak EPA. If climate change is not an concern for Trump, fossil fuel companies could do well.
- US Steel (X) will benefit if Trump makes steel prices more competitive in the US and prevents China from providing steel at low costs.
- Large banks, such as Bank of America (BAC) and Wells Fargo (WFC), will increase profits if there is less consumer protection and less bank regulation. Reduced regulation could set up a crash in the sector but before that happens banks could do well.
- Trump is a supporter of handguns for all American. Smith and Wesson (SWHC) handgun manufacturer could do well.
- Trump promises increased defense spending which will help companies like Lockheed Martin Corp (LNT) and Northrop Grumman Corp (NOC).
Ford Motor Company (F) is an example of a company that may have problems with a Trump administration if he puts a 35% tax (or some tariff) on cars manufactured in Mexico and sold in the US. Trump has been calling out Ford in particular on twitter again and again which does not help their stock price.
Kansas City Southern (KSU) which ships goods across the border is another example of a company that may face problems if a wall (and crossing restrictions) become a reality.
INVESTMENT CONCLUSION
According to the Shiller PE10 ratio (a common indicator of the price of the market) the US market is higher than normal, indicating that the market is overpriced.
It is possible that these stocks that should do well in a Trump administration will perform poorly over the next four years. We generally assume the market is efficient and priced according to publicly known information. The stock market is priced based on expectations of corporate tax cuts, less regulation, and a holiday on repatriated money for companies. We recommend holding a diversified portfolio and rebalancing regularly.
There is a lot that is unknown about a Trump presidency. He has made contradictory statements about many issues including climate change. He has a habit of calling out individual companies which dramatically changes their stock values.
There is concern about what a Trump administration means for trade agreements and immigration’s impact on our workforce.
Import-dependent businesses are concerned about Trump turning toward the kind of protectionism. The president has considerable latitude in this area. China is a main point of contention. We have seen Trump use Taiwan as a tool which was not received well by Beijing. There could be a new US-China trade agreement.
More will be reviled with time.