Early this morning, Donald J. Trump defied polls and predications, becoming the first President elect of the United States with no political or military experience. With both the House and the Senate remaining under Republican control, it is very likely that Trump will be able to implement his tax and economic policy, ultimately affecting our wallets and our stock market.
Dow futures indicated that global markets would be in turmoil following a Trump victory, but it looks like Trump's comforting promise to stimulate the economy, and use his experience as a business man to bring jobs back to America has had no immediate effect on the stock market around the market open on Wednesday. The best advice right now is to look at your portfolio in the bigger picture, stay invested, and make appropriate tweaks to keep your investments current based on proposed changes.
Trump's proposed plan from a tax perspective will be good for most households, but favors the wealthiest tax brackets dramatically. The top 1% of the population would get a tax cut down to 33% down from their current rates of 35%-39%. The plan is estimated to lead to higher after tax income of 10%-16% for the top 1% of the population. The only bracket that will see an increase are those making between $112,000-$190,000; their rate will increase from 28% to 33%.
The overall plan is estimated to lead to at least .8% higher after-tax income for all taxpayer quintiles.
Corporations will also benefit from a tax perspective, with Trump proposing a 15% corporate tax rate across the board. In an aggressive effort to keep and create jobs domestically, Trump will impose a 35% tariff on goods imported into the United States by U.S. companies that have moved overseas. This makes it almost impossible for companies to be competitive using foreign manufacturing. If properly implemented, this is good news for the lower and middle class employment numbers, which generally leads to a stronger economy for all. The concern here is that domestic jobs, and domestic taxes can cost companies drastically more than what they are paying now. S&P 100 companies pay roughly 44 percent lower rates on international taxes than U.S. taxes, which means we will likely see a big hit on highly globalized companies that ship jobs outside the United States, while seeing an increase in domestic employment. The other concern is that keeping jobs domestically will increase costs dramatically for companies that save by manufacturing internationally.
Other factors to consider when assessing the future of our economy under a Trump Presidency are historical returns of past Presidents, and what that could show about our portfolios now. The S&P 500 has grown at a 16.36% annual rate with a Republican president and a Republican Congress. This is higher than any other possible scenario. Past performance certainly does not affect future results, especially with so little history to compare to, but it is a fact to consider, and should serve as a small amount of comfort to timid investors.
The Tax Foundation, a non-partisan research group that provides tax research and guidance makes the following projections about the economic impact of Trump's policies. The Trump tax plan would increase the long-run size of the economy between 6.9% to 8.2%. This would result in higher wages (5.4%-6.3%), and larger capital stock (20.1%-23.9%). The plan would also result in higher employment, adding between 1.8-2.2 million more full time jobs.
A Trump Presidency will favor higher household incomes and keep business in the United States. His policies are good for most domestic businesses, and most households financially across the board. If you are sitting on the sidelines with your cash, get it invested. A recent study by Blackrock has found that Millennials have 70% of their money in cash, followed by 68% on Generation X, and 60% of baby boomers. That money should be put to work to grow our portfolios, and grow our economy. We just elected a President whose main objective is to boost our economy, and it is time to believe that even if we suffer from short term volatility and pull backs, long term investing helps us put money in our pockets and achieve our goals.
If this election has taught us anything, however, it is that things don't always turn out how we expect, and for this reason, it is very important to keep a well-diversified portfolio. Keep a healthy mix of stocks, bonds, international securities, and alternative investments. Buy high quality companies, and don't make decisions based on day to day fluctuations. It makes sense to have a portfolio that is diversified both in and outside of the United States to avoid any dramatic movements that will be caused by Trump's plan, or additional outside factors. Russ Koesterich, Head of Asset Allocation for BlackRock's Global Allocation Fund, suggests thinking about diversification outside the US considering the election.
"It is a big world out there. The US is a shrinking portion of global economic activity."
Having a healthy amount of exposure to international and emerging economies will help prevent too much exposure to one piece of a global economy.
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