Trump Wins: What Should Investors Do Now?

Defying the polls and odds, Donald J. Trump won the Presidential Election. As the results became clear on the evening of November 8th, financial markets around the world reacted swiftly: stocks plunged (at one point during the overnight session, US futures were down 5 percent, indicating a more than 800 point wipe out for the Dow Jones Industrial Average), the Mexican peso cratered by 13 percent, the US dollar tumbled and safe havens like gold, US Treasury bonds and the Japanese yen, jumped. Then a strange thing happened: as Mr. Trump spoke in the wee hours after capturing enough Electoral College votes to win, markets started to reverse course, as investors seemed to take some comfort in his conciliatory tone. By the time they rang the opening bell on the day after the election, stocks had steadied and actually closed higher on the session. So much for predictions of stock market crashes, at least in the short term!

So what happened over the course of 18 hours? It could be that investors may have learned a lesson from the UK Brexit vote. After that unexpected outcome in June, US stocks were down 5 percent in the subsequent two trading sessions, but then slowly marched back up, as investors concluded that it would take a long time to figure the impact of Great Britain’s departure from the European Union.

While investors had been concerned about some of candidate Trump’s campaign rhetoric on trade and immigration, in the immediate aftermath of the election, it was hard to measure the impact on the US and global economy as well as what future policies could mean for corporate earnings. Still, hours after the results came in, I was inundated with reader/listener/viewer questions that went something like this: “What should I do with my retirement account?” The answer for long-term investors is clear: ABSOLUTELY NOTHING!

Unexpected events can create market volatility—both to the upside and the downside, which can lure you into feeling like you should do something. Try to resist that urge by reminding yourself that you are not investing for the next four weeks, four months or even four years--you are trying to build your nest egg beyond those time frames. And even if you were planning on retiring at the end of this year, you aren’t likely to pull all of your money from your account at once – you need it to last for decades in the future. In other words, you are not investing to retirement; rather you are investing through retirement.

That’s why you have created a diversified portfolio, based on your goals, risk tolerance and time horizon - because over the long term, this strategy works. Yes, the unknown is scary and can lead to market volatility, but you have to refrain from being reactive to short-term market conditions. It’s not easy to do, but sometimes the best action is NO ACTION.

If you were freaked out when you saw big numbers on the downside, maybe your portfolio has too much risk. If that’s the case, you may need to readjust your allocation to better align with your risk tolerance. If you do make changes, be careful NOT to jump back into those riskier holdings after markets stabilize. Conversely, if you were kicking yourself for not being fully invested as stocks swung back to the upside, you might need to hold your nose and get back in. Battling emotions is something every investor encounters-one way to help you out is to establish auto-rebalancing for your accounts, which can help take fear and anxiety out of the investment process.

Here are some (early) potential financial/regulatory outcomes that could arise from the 2016 Election:

• Markets: Volatility will continue until there is greater clarity on the Trump Administration’s priorities
• Trade: The Trans Pacific Partnership is likely a dead deal, but how Trump “renegotiates” NAFTA or goes after China as a currency manipulator will be key in determining whether or not he could ignite a global trade war.
• Taxes: Trump’s plan will come under closer scrutiny, because his trillions of dollars worth of tax cuts could balloon the national debt to more than 100 percent of GDP within a few years. How will fiscal conservatives make peace with that potential?
• Federal Reserve: On course to raise interest rates at the December meeting, but some Governors might step down after that occurs. President Trump can make appointments to the FRB to fill vacancies, but he is stuck with Chair Janet Yellen until her term ends in February 2018.
• Consumer Financial Protection Bureau (CFPB): In October, a federal appeals court ruled that the CFPB was “unconstitutionally structured” and as a result, the agency should be treated like others, where the president can supervise, direct and change the director at any time. Current CFPB chief Richard Cordray is unlikely to keep his job.
• Dodd Frank: Would be one of the great ironies to have a populist President, put in office by an electorate that hates banks, lighten up the regulatory impact stemming from the financial crisis.
• Department of Labor’s Fiduciary Rule: The rule is set to go into effect in April 2017. Get ready for big investment firms, which fought tooth and nail NOT to put clients’ interests first, to resurrect the battle and to water down this consumer-friendly rule.

#295 Clinton vs Trump, By the Numbers

With just over a week until the election, it's time to take measure of Clinton vs. Trump, by the numbers. Thankfully our guest Jeffrey Levine, Chief Retirement Strategist and Director of Retirement Education with Ed Slott’s Elite IRA Advisor GroupSM as well as CEO and Wealth Advisor with BluePrint Wealth Alliance, helped us sort through the candidates' plans.

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Medicare/Social Security: Both candidates want to slow the pace of health care costs by allowing Medicare to negotiate with drug manufacturers, but similarities stop there.

Although Trump called for privatizing Social Security in the past, he recently said he wants to keep the government plan in place because he believes it would be “honoring a deal.” He plans to address “the tremendous waste, fraud, and abuse in the program. But we’re not going to hurt the people who have been paying into Social Security their whole life and then all of a sudden they’re supposed to get less.” Trump's stance has generally been that he will do everything in his power to avoid touching Social Security – a position that doesn’t actually jive with that of many other Republicans – but he postulates that he will be able to do this my merely cutting waste and growing the economy. This would seem to be an incredibly difficult, if not impossible task, even using the most optimistic of projections.

Clinton wants to create a caregiver credit “that prevents penalizing those who are out of the workforce due to caring for others,” which sounds great in theory, but Levine has some serious questions as to how it would actually work in the real world. To beef up the SS retirement system, Clinton “opposes raising the full retirement age, privatization of Social Security, and any reduction in benefits or cost-of-living adjustments (COLAs)."  Levine notes that when Social Security was established, the average life expectancy was far less than what it is today, and yet the full retirement age has only increased by one year over that time. Consider that in 1940, roughly 54 percent of men and 61 percent of women surviving to age 21 lived to reach age 65. Fast forward 50 years and, by 1990, about 72 percent of men and nearly 84 percent of women could expect the same results. Under a Clinton administration, the Social Security Wage Base (currently $118,500 in taxable earnings), would increase.

Historically speaking, roughly 90 percent of earned income was subject to Social Security taxes. As the wealth and income gaps have widened in recent years though, that number has dropped closer to 83 percent. To restore that mark closer to historical norms, Clinton would need to raise the Social Security earnings cap to about $250,000 – a massive increase from where we stand today. It should be noted that even with no cap whatsoever, other changes would still have to be made to keep Social Security solvent over the long run. Clinton also seeks to make income other than earnings subject to Social Security taxation. This too, would represent a major change.

Taxes The following are tax plans to date according to the candidate’s websites and the Associated Press.

Under a Trump administration, the following tax changes have been suggested:

• Reduce the seven tax brackets to just three, at 12 percent, 25 percent and 33 percent, and cut the top income tax bracket to 33 percent from its current level of 39.6 percent.
• Cut the corporate rate from 35 percent to 15 percent, also cutting taxes on “pass-through” business income for small businesses to 15 percent.
• Eliminate the estate tax, which, as of 2016, has a $5.45 million exemption ($10.9 million for married couples) and a 40 percent tax.
• Steepen the phase-out of itemized deductions under the existing Pease limitation, which currently phases out deductions at 3 percent for every dollar that adjusted gross income exceeds $300,000 ($250,000 if single).
• According to the Tax Policy Center, Trump’s tax proposals would add a $11.2 trillion to the national debt over the next decade. Trump has largely disputed such estimates, citing that under his leadership, economic growth would double to about 4 percent, leading to more workers,. better paying jobs, and thus, more revenue.

Under a Clinton administration, the following tax changes have been suggested:

• Increase several taxes on wealthier Americans, including a 4 percent surcharge on incomes above $5 million, effectively creating a new top bracket of 43.6 percent.
• Imppose a minimum 30 percent tax rate on income above $1 million a year
• Cap deductions for wealthier taxpayers.
• Increase the estate tax exemption to former 2009 parameters of 3.5 million ($7 million for married couples), with the tax rate of 45 percent.
• Maintain current tax levels for the bottom 95 percent of taxpayers, which according to the Tax Policy Center and the most recent income and tax data released by the IRS and reported by the Tax Foundation, would mean those who earn income of $179,760 or less annually. That said, the Clinton campaign has said taxes would not rise for those making less than $250,000.
• Clinton has proposed expanding the child tax credit by doubling the credit to $2,000 per child.
• Clinton's tax proposals – when viewed in isolation – are estimated to reduce the national debt by $1.2 trillion over the next decade. However, when adding in other proposals, the national debt would increase by more than $10 trillion.

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

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Elections and Markets

With a month to go before Americans hit the polls, it’s time for the quadrennial exercise of predicting how elections will impact stock prices. Let’s start with a disclaimer: as a long-term investor, you should not make changes to your portfolio in an effort to outfox the tried and true investment strategy of identifying your personal goals and objectives; creating and sticking to a diversified asset allocation plan, which incorporates low cost index funds; and rebalancing two to four times a year. That’s why the following should come under the category of “fun with facts and figures,” rather than any prescriptive advice as to how to reallocate your portfolio. That said, there are going to be a lot of articles and news segments, not to mention political commercials discussing which candidate is better for your money, the markets and the economy. Let’s start with the “Presidential Election Cycle Theory”, which posits that regardless of whether Republican or Democrat becomes the leader of the free world, US stock markets are weakest in the year following the presidential election, improves in the second year, peaks in the third year and then is weak in the fourth year. The Presidential Election Cycle Theory has held up even better for two-term presidents.

But like almost every market theory (“The January Effect”, “Sell in May and Go Away”), there are always exceptions to the rules. While the theory played out through most of the twentieth century, it has been less reliable lately. In fact, the last four years has disproved the Election Cycle Theory. In the first year of President Obama’s second term, the Dow saw an impressive 27 percent return and then 7.5 percent in year two. Last year, which was supposed to be the strongest of the cycle, the blue chip index dropped by 2 percent. The Dow is up 5 percent through the first three quarters of the year.

How does the President’s party affect the stock market? Data show that since World War II, the average compound annual growth rate for stocks is 9.7 percent under Democratic Presidents and 6.7 percent under Republicans. The analysis can be carved up lots of different ways, depending on a split Congress and chances are you can find the combination that supports the way you want to vote.

But a recent academic study, “What to Expect When You’re Electing,” finds that “There is no systematic difference between Republicans and Democrats” when it comes to steering the direction of the stock market. What does matter is the direction of interest rates: the stock market tends do better when rates are going down than when they are rising. Given that the Fed is likely to restart its interest rate hike campaign, that could mean that whoever occupies the Oval Office will preside during a period when the stock market retreats.

Maybe we are looking at this backwards: According to InvesTech Research, the market may be a better indicator of the presidential election than visa versa. Generally speaking, if the stock market is up in the three months leading up to the election, the incumbent party usually wins. Losses over those three months tend to mean a new party will take control. In the 22 president elections since 1928, exceptions occurred in 1956, 1968 and 1980. In other words, the S&P 500 has an 86.4 percent success rate in forecasting the election.

I know you wanted a simple answer: Trump or Clinton, but in the end, isn’t it better to know that party affiliation has far less to do with your portfolio’s performance than bigger, macro economic trends? Instead of trying to outsmart the Mr. Market, my advice remains simple: address what is within your control, by creating a financial plan.

Employment Report: The Labor Department reported that the US economy added 156,000 jobs in September, slightly lower than expectations. The unemployment rate edged up from 4.92 percent in August (rounded down to 4.9) to 4.96 percent (rounded up to 5) in September, due to a 444,000 increase in the labor force. As a result, the participation rate climbed to a six-month high of 62.9 percent.

The broader unemployment rate (U-6), which includes people who want full-time jobs but can only get part-time jobs, remained at 9.7 percent. According to economist Joel Naroff, talking about broad unemployment “is meaningless.” The problem, he says, is that businesses have likely permanently shifted to hiring more part-timers than in the past, which makes comparing today’s U-6 rate with the pre-recession rate of about 8.3 percent, pointless. “People might want to work full-time, but if businesses don’t want full-timers, there is nothing workers can do. It is not the economy that has caused the rate to be high, but business hiring decisions.” 

MARKETS:

• DJIA: 18,240, down 0.4% on week, up 4.7% YTD
• S&P 500: 2164, down 0.7% on week, up 5.4% YTD
• NASDAQ: 5292, down 0.4% on week, up 5.7% YTD
• Russell 2000: 1236, down 1.2% on week, up 8.9% YTD
• 10-Year Treasury yield: 1.72% (from 1.62% week ago)
• British Pound/USD: 1.243 (from 1.2973 week ago) Trading in pound saw a dramatic, though short-lived 10 percent plunge fall on Friday, attributable to computer-based program trading.
• November Crude: $49.81, up 3.3% on week
• December Gold: $1,258.60, down 6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.26 (from $2.22 wk ago, $2.31 a year ago)

THE WEEK AHEAD: Quarterly corporate earnings begin this week - analysts expect a sixth consecutive year-over-year drop. The estimated earnings decline for the S&P 500 is -2.1 percent, led lower by energy and materials, according the FactSet. If the energy sector is excluded, the estimated earnings growth rate for the S&P 500 would improve to 1.3 percent from -2.1 percent.

Mon 10/10: Columbus Day Banks closed, stock markets open, bond market closed

Tues 10/11:

Alcoa

6:00 NFIB Small Business Optimism

Weds 10/12:

10:00 JOTS

2:00 FOMC Minutes

Thursday 10/13:

8:30 Import/Export Prices

Friday 10/14:

Citigroup, Wells Fargo

8:30 PPI

8:30 Retail Sales

12:30 Janet Yellen speaks