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Ben Strubel
Ben Strubel
Articles (109)  | Author's Website |

Trump Won; Now What?

After the election the market moved sharply with some sectors rallying and others falling

November 15, 2016

During the primary season we wrote a series of four articles about which stocks to buy or sell if one of the four leading candidates (Donald Trump, Ted Cruz, Hillary Clinton or Bernie Sanders) was elected.

The articles were written more for fun than for serious analysis. After all, during the primary season and the election candidates will say all sorts of things to get elected and make promises they have no intentions of keeping. You also don’t get a good idea of what candidates might do until you see who they decide to tap for important Cabinet and agency head positions.

Now that Trump has shocked the world and won the election the market has moved sharply. The dollar strengthened, interest rates are up, industrials and health care are up. Consumer staples, utilities and tech stocks are all down. Are these moves warranted?

In contrast to our previous pieces this article is a serious look at what might transpire under President Trump.

Let’s start with the basics. The Trump administration is likely to resemble a traditional Republican administration. According to the Wall Street Journal during his meeting with Obama, Trump was surprised by the scope of the job, and aides were surprised that the entire West Wing staff would need to be replaced.

While Trump is likely to reward some out-of-the-Republican-mainstream loyalists and supporters like Newt Gingrich and Rudy Giuliani with important positions, the bulk of his hires are likely to come from inside the sphere of the traditional Republican Party. Indeed, his chief of staff is lifelong politician Reince Priebus who was the former head of the RNC. We can also look at what Trump and his closest advisers and staff said after the election to see on what they have changed their views and what they continue to say.

In our view here are the four most likely important policy changes we’ll see under Trump.

Infrastructure spending

Trump has stated he wants to spend around $500 billion to $1 trillion on infrastructure projects. This is probably one of the two or three campaign promises we should take most seriously. Trump has a background in real estate so it’s likely he has a high personal interest in this plank of his policy. Additionally, his advisers have actually come up with a plan for this policy as well. The plan developed by his advisers is not fully fleshed out and relies on a strange combination of federal tax breaks to incentivize private firms to build revenue-generating infrastructure (toll roads, water and sewer systems, etc.) for a cut of future revenues. In other iterations the plan relied all or mostly on deficit financing. It’s likely that the final version will have some combination of the two and will of course face numerous tweaks from Congress.

Also, infrastructure spending enjoys bipartisan support so it’s likely that some type of large infrastructure bill will be able to pass both chambers of Congress (any plan that relies on deficit spending will likely face a revolt by some more conservative Republicans so Democrat votes will likely be needed to pass the plan). A public-private partnership plan would not be a simulative as a purely deficit financed plan since and we have doubts that anything close to the size of the $1 trillion plan will be passed. But some type of infrastructure plan is likely.

Tax cuts

Trump promised tax cuts, and Republicans love tax cuts. With Republicans in control of both houses of Congress there should be no trouble passing some type of tax cut package. We would also expect the tax cuts to add significantly to the deficit. There is already a push under way for another one-time 10% repatriation tax (we are calling it a tax cut because it lets companies bring home foreign cash cheaper than they could now) on foreign cash holdings for domestic corporations. While this won’t help the economy as it does nothing to stimulate demand it should support higher stock valuations as it’s likely the extra cash will be spent on share buybacks and dividends as it was during the last tax holiday.

Trump’s plan for lowering individual and corporate taxes is a bit of a mixed bag. While it will add to the deficit and thus be a form of fiscal stimulus for the economy the benefits will disproportionately accrue to higher income earners (corporate and individual). Because higher income earners have a higher propensity to save, little of the tax savings get spent back into the economy. For instance the Bush tax cuts had a fiscal multiplier of .32 meaning that for every dollar in tax cuts generated only 32 cents in economic growth. Contrast this with infrastructure spending which almost always has a fiscal multiplier of greater than one and in some estimates can be as high as two.

The tax cuts will help the economy, but the bulk of the benefits will accrue to higher earners and the net impact to the economy will be small due to the small fiscal multiplier.

Budget sequestration

No one likes budget sequestration. It was a brilliant tactical move by the Republicans to prevent the Democrats from getting anything done during the last several years of the Obama administration, and it worked. Not much got done. Now that we have a Republican president and Congress there is no reason to keep sequestration in place. Trump hates it, and Congress wants to get rid of it so it’s almost a lock to go.

Immigration

Trump ran on a platform of severely restricting immigration and deporting millions of illegal immigrants. While immigration numbers have fallen from their peak several decades ago immigrants still form an important part of the economy. There are millions of undocumented workers here that are earning wages and in turn spending that money back into the economy. Deporting them in substantial numbers would have a serious effect on economic activity as you are essentially removing millions of customers from the economy. This is somewhat tempered by the fact that many first-generation immigrants send substantial amounts of money back home so their propensity to consume is likely lower than that of other workers in their same income bracket.

I’m a bit skeptical that there will be a substantial change in immigration policy or at least a change that is large enough to effect the economy and in turn the stock market. Already Trump has started to clarify his immigration policy, and it is not as harsh as some of the things he has said on the campaign trail. He recently stated that he is now only looking to deport illegal immigrants with criminal records (which is something the Obama administration has been doing) and he has also walked back his plan to build a wall (now saying some parts might just be a fence). He also has stated that he won’t begin any deportations right away but will instead wait until the border is secure (presumably meaning the wall/fence is built).

Summary

From a fiscal and economic perspective there is a lot to like from Trump’s proposed policies, especially if you are a corporation or high income earner. While some of the market moves maybe be justified I’d be a bit skeptical about a huge infrastructure package immediately jump starting the economy. Infrastructure projects take time to get going and any public-private plan will not be as stimulative as it could be otherwise since increased spending now by construction companies will be balanced out by lower spending later by those paying for the project. Building a bridge now stimulates the economy while the tolls charged to drivers later remove income and spending from high propensity spenders (drivers) to a lower propensity spender in the corporation that built it. Likewise, large tax cuts aimed primarily at the wealth and corporations will certainly provide a boost for the stock market but would likely not cause any substantial acceleration in economic growth or inflation.

The initial market reactions to Trump might be overdone, but we certainly are moving in a direction that is largely positive to corporations (thus stocks), and higher economic growth and inflation in the future although growth and inflation may be lower than the market is expecting.

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About the author:

Ben Strubel
Ben is President and Portfolio Manager of Strubel Investment Management LLC, a value-oriented, independent, fee-only Registered Investment Advisor (RIA) based in Lancaster, Pennsylvania.

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