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President-Elect Trump and Your Portfolio

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November 21, 2016
Managing your stock portfolio during political unrest.
iStock.com/uschools

In a constantly changing world filled with uncertainty, it’s a good idea to examine your portfolio on a regular basis – especially after a significant event like the United States’ elections. The results are in and Republicans have won a clean sweep of both the Legislative and Executive branches, which hasn’t happened since 2006. The likelihood of significant legislative activity has increased because of single-party control. 

As with any election, what happens next may be difficult to predict. While the issues on President-elect Trump’s agenda were fairly apparent throughout his campaign, the specifics in the programs and  the order of priorities and which legislation the new administration will be able to pass remains unclear. The major focuses of his campaign were on tax reform, easing regulations, foreign and trade policy, repealing the Affordable Care Act (ACA), and increased spending on infrastructure and defense.  Trump has already softened his stance on some of these, but major changes in these areas could have a significant impact on investment performance.

Based on sector performance following the elections, the market appears to believe HealthCare, Energy, Financials and Industrials would benefit under Republicans. Below, are some of the areas Mr. Trump focused on during his campaign and potential market reaction. 

Easing Regulation

The excessive burden of regulation on American businesses was a regular talking point for Trump throughout his campaign. The market’s take is that the incoming administration and Congress will be much lighter on regulation, and will repeal or refactor large portions of the regulation enacted during the outgoing administration. The perception is these areas are likely to be the most affected:

  1. HealthCare: The refactoring or repeal of the Affordable Care Act (ACA), or most likely the stripping down of the ACA, could have significant impacts within the HealthCare sector. Many companies in the sector reacted positively to the election results, but more specifics of the new administration’s plans are needed to judge winners and losers from the potential changes in healthcare legislation.
  2. Energy: An easing regulatory environment would be a positive for energy companies on a number of fronts. Energy equities have been reacting in line with the overall market following the elections.
  3. Financials: Republicans have admitted in the past a repeal of Dodd-Frank is nearly impossible, but they claim changes could be made to ease the burden on financial companies. So far, financial companies have been reacting positively to the election results due to the anticipated easing of regulation and increasing yields since the election.
  4. Alternative Energy: Less regulatory burden on traditional energy resources, combined with a reduction of subsidies could have significant effects on alternative energy companies like Tesla (TSLA), SolarCity (SCTY), and First Solar (FSLR). These stocks have reacted negatively to the election results so far.
  5. Technology: The Technology sector has reacted negatively to the election results as well. While this is understandable for some companies with manufacturing relationships overseas due to Trump’s comments on foreign and trade policy. This could have large ramifications on where parts or components are made and the overriding fear of tariffs.
  6. Repatriation: This is sure to be one of the most talked about issues in the first 100 days as part of overall tax reform. Legislative changes could ease the burden on companies wishing to repatriate cash. Under current corporate tax rates, repatriated cash would be taxed at 35%. A significant reduction in tax rates would allow companies like Microsoft (MSFT), General Electric (GE), Apple (AAPL), and Pfizer (PFE) to repatriate cash and potentially save billions of dollars. It is possible this excess cash could then be reinvested in the business or used to increase dividends and share buybacks.
  7. Business Inversions: These transactions, designed to lower tax rates, were under significant scrutiny under the Obama administration, which effectively ended the practice. This may be readdressed as part of the overall tax reform.

Foreign and Trade Policy

Mr. Trump had strong comments regarding foreign and trade policy throughout his campaign, specifically our relationships with Mexico and China. Changes in free-trade agreements would significantly affect the Mexican economy and the Peso. The Peso has been very volatile in post-election trading and this is expected to continue as investors await further detail of potential changes to our relationship with Mexico. Investment in Mexico will likely slow as businesses wait for clarity on their Mexican assets and the ability to reimport to the US. This could negatively affect sectors including autos and manufacturing companies that have benefitted from moving operations across the border.

China has been another focus throughout the Trump campaign. Trump has said he will label China a currency manipulator, which has the potential to upset ties with China. This has broad implications for business in general and is likely to meet with domestic push back, as China continues to grow in economic power. Significant changes to our foreign relations and trade agreements with China could impact retailers who import products from China and companies who outsource manufacturing to China. This could also have implications for Chinese companies listed on US exchanges like Alibaba (BABA) and Weibo (WB).

Fiscal and Monetary Policy

While Republicans are usually perceived to be the fiscally conservative party, recent history has not proved this to be the case. If Republicans start to tighten the fiscal belt, this could prove detrimental to industries dependent upon Federal spending – especially defense companies. It could also significantly affect the overall economy as a decreasing budget deficit decreases money supply. 

Trump has been vocal and critical with his opinions about the Federal Reserve and its monetary policy. If these comments continue there is the potential for increased periodic bouts of volatility in US Treasury securities, the US Dollar, and interest rate sensitive sectors.

What It Means for You

While there is a lot of uncertainty over when and which of these potential issues will be addressed. There will likely be some follow on volatility after the election due to market reactions to further details of Republicans’ and Trump’s intended agenda, or announcement of Trump’s cabinet members.

Remember, after a major event like this, it’s a good idea to examine your portfolio – especially if you haven’t done so in a while. You may also want to review the recently launched Essential Portfolios, an automated investing solution that helps build an investment strategy tailored to your financial goals, offered by Amerivest Investment Management , LLC. This could be of particular interest to those who want to be invested in the market, but don’t have the time to actively manage their portfolio.

Regardless of your investing style, it’s important to remember you don’t have to be all in and you don’t have to be all out. Your portfolio should reflect your beliefs about different sectors and how you think they will perform. If it doesn’t, it may be time to slowly start making some changes. 

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