Donald Trump becomes president today, January 20th, 2017. Some of you are happy with this outcome, and others of you are dreading the coming four years. Many of you across both groups might be unsure what Donald Trump’s new presidency means for your investment strategy. No one can predict the day-by-day changes in the stock market, but I can give you some advice on how to position your investments. Below, I discuss ways that your investment thesis may change after Donald Trump’s inauguration.
Positive Investment Outlook of a Donald Trump Presidency
Donald Trump has outlined a few key aspects of policy which will be beneficial to businesses in the United States. It is important to remember that the goal of your investment thesis should be to buy the maximum amount of risk-adjusted profit. Therefore, any policy that leads to greater profitability for business in the United States will likely improve investment performance.
Reduced Corporate Taxes
The policy of President Trump which is most favorable to a positive investment outlook is his stated goal to reduce corporate taxes. The current corporate tax rate of 35% is one of the highest in the world. A high corporate tax rate makes investment in the United States less favorable for companies. Any reduction in the effective corporate tax rate in the United States will lead to greater profits for US corporations, all else equal. Thus, greater profits for US corporations means a greater after-tax return for investors in US and foreign corporations that do business in the United States. If Donald Trump is successful in reducing the corporate tax rate from 35% to 15%, this would be a substantial windfall for investors.
Reduced Government Regulation
A second policy of President Trump which favors a positive investment outlook is his goal of reducing government regulation. Government regulations are a useful tool by which society is able to ensure that negative externalities are taken into account in business decisions. However, government regulations once put in place, are seldom revisited or reduced in scope. This means that over time, they tend to grow and lead to inefficiencies which can reduce the ability for business to operate effectively. Reducing government regulations will reduce costs on new businesses and startups as they try to compete in the marketplace.
Increased Infrastructure Spending
Donald Trump also wants to increase infrastructure spending in the United States. His stated goal is to both repair aging infrastructure and provide additional jobs. Additional government spending tends to provide a short-term stimulus to the economy. As the economy improves, businesses not directly impacted by the spending will see benefits to profitability as well. In addition, a better, safer, and more efficient country infrastructure benefits both workers and businesses. Infrastructure acts as a “free” boost to the ability for US entrepreneurs to take advantage of business opportunities. For example, a truck driver is able to deliver his cargo faster and more efficiently with the existence of the highway system. When the highways are in good condition, there is less chance of accidents which could delay deliveries.
Negative Investment Outlook of a Donald Trump Presidency
Not all of Donald Trump’s policy proposals will benefit investors. In fact, Trump’s election as president could negatively impact short-term investment performance regardless of whether he implements some of his proposals. One of the key reasons for this, is that Donald Trump’s election has created a shroud of uncertainty and unrest within the United States. Uncertainty leads to reduced or cautious business investment and consumer spending. Reduced business investment and consumer spending are key factors which could lead towards a recession. For this reason, investments in general, dislike uncertainty.
Fear among minority populations of the United States is one major aspect of the uncertainty that Donald Trump has created. Donald Trump spoke with a large amount of negative rhetoric targeting those of specific ethnicity and faith as a means of building support for his election. Due to this behavior, there are many US citizens who now fear what will come in the next few years. Will they be targeted with policies that take away their rights, or livelihoods? Are they safe within their own borders? Accordingly, these fears will have a negative impact on the US economy whether or not the fears are proven true. Uncertainty and fear are feelings which prevent or reduce the ability of a group to start, expand, or grow business. We are all interconnected in the economy. Therefore, reduced economic growth in some areas, will lead to a reduced economic outcome for everyone.
Reduced Free Trade
Donald Trump plans to reject, reduce, or eliminate future and current free trade agreements. This is perhaps the most damaging policy, in terms of investment outlook, of our new president. Free trade, or trade without tariffs or protectionist barriers is an incredibly positive force for business performance. Arguably, free trade allows businesses to take advantage of each countries particular competitive advantages. The United States with high design and technical expertise is an example of a good place to design new products. Meanwhile, Germany with high manufacturing expertise is a great place to build products. Alternatively, China with low labor costs is a good place to build products. Businesses that can leverage low production costs in one country with high sale prices in another country are more efficient and profitable. If you’re an investor, you want the businesses that you own to operate in the most efficient and profitable manner possible.
However, Donald Trump’s plan to use tariffs will reduce free trade. Import taxes discourage the importation of goods. Essentially, you’re putting in place an artificial barrier to the best economic action of a business. Artificial price controls of any form are always inefficient and create economic dead loss. Yet, Donald Trump has made it his goal through campaign rhetoric to ‘bring back jobs’ and ‘protect the US worker.’ He hopes to do so by implementing policies that will reduce free trade. However, reducing free trade will not only reduce corporate profits and the performance of your investments. It will also reduce the international competitiveness of US companies and US workers. This will, over time, lead to lower wages and greater unemployment for the US worker. In other words, President Trump’s plan will backfire.
What changes should you make to your investments?
President Donald Trump will make policy changes that will affect the profitability of some businesses in the short-term. Moreover, there is a chance that some of his policies will affect the long-term performance of your investments. However, it is impossible to predict this outcome, either positive or negative in advance. We can’t know which policies Trump will be successful in implementing. Although we can predict some of the first-order effects of these policies, it is also hard to predict the second and third order effects that they will have. This is especially true regarding free trade agreements.
Remember history. The United States has had all manner of presidents. We have had popular presidents and hated presidents. We’ve had rich and poor presidents. We’ve had good and bad presidents. In addition, the political experience of our presidents has been quite diverse. However, historically the stock market has continued to provide annual returns of 10% or more over the long-term. These returns are consistent through both Democrat and Republican presidencies. Ultimately, the returns have continued through two world wars, a civil war, great depression, and great recession.
All of this is to say that you can’t predict the short-term performance of your investments. The four-year time span of a presidency is definitely short-term. The value and price of your investments can fluctuate substantially over that time period. Ten years is the minimum I would consider long-term investing. Over this time frame, the fundamentals of the businesses that you own will have the greatest effect on your investment performance.
The best advice I can give you is to simply ignore the election of Donald Trump as a non-event in your investing outlook. Perform fundamental analysis of the profit potential of the businesses that you want to invest in. Determine the likely outcome of their future cash flows under worst and best case scenarios. Analyze what risks might cause your projections to be wrong. Invest with a margin of safety. Hold for the long-term. If you do these things, then your investment performance will be satisfactory regardless of who is president. You can’t predict what policies Donald Trump will actually implement or how they will turn out, so don’t worry about it. Let the leaders of the companies you own worry about it. Their job is to figure it out and make you money.