1. What expectations should investors have for portfolio returns?
Over the next year, we anticipate equity and fixed income returns to be below historical averages, tempered by the effects of global monetary policy, global economic growth, and uncertainty over Trump’s presidency.
Trump’s surprise victory has thus far prompted a more positive market reaction than initially expected. However, it’s doubtful that the market has fully digested the issues raised and the many uncertainties that his presidency may bring.
While our continued overweight of U.S. growth and dividend equities has been rewarding for clients, from a risk/return perspective we are carefully considering whether a reduction in our equity exposure is warranted.
U.S. equities are back at record highs, supported by an improving corporate profit outlook and prospects for lower taxes. Valuations, though not excessive, do appear “full & fair.” This will likely limit stocks’ upside potential in 2017, while downside risk is expected to be at least normal, if not higher.
2. How will a Trump presidency impact the economy?
Little is presently known about Trump’s economic plan or what could realistically pass Congress. A Trump presidency could potentially mean major changes in fiscal policy, trade policy, immigration, environmental policy, financial regulation, healthcare, Social Security, and supervision of the Fed. The key question is, which version of Trump will we see? Pro-growth or anti-free trade? Will he be anti-globalization and support increased tariffs?
Tax cuts, regulatory relief, and infrastructure spending measures have the potential to boost growth. If enacted, these policies could potentially add between 0.5 to 1.0 percentage points to GDP growth over the next two years. However, it is important to note that any impact on the economy probably wouldn’t be felt until the second half of 2017 at the earliest.
3. How do President-elect Trump’s plans impact various sectors in the muni market?
We don’t yet know the difference between campaign promises and what will actually make up the future president’s agenda. Here are some possibilities:
- Cuts to Medicaid aid could force states to lower spending or seek additional sources of revenue
- Trade negotiations may lead to an economic slowdown that would hurt incomes and sales taxes
- Support of schools of choice and charter schools could hurt low-performing school districts
- Expanding mining and drilling activity could improve severance tax collections for resource-rich states
4. What is the expectation for the Federal Reserve given a Trump presidency?
In the near term, the Fed is still expected to raise rates at its December meeting. It has been preparing the markets for an interest rate hike since the summer, and because of this, the implied probability of a hike in December has risen to over 90%. We believe the economy is currently strong enough to handle an increase in the target range of 0.25%. In the past, the Fed doves have used domestic and international uncertainty as a reason to delay a rate hike. We do not believe this will be the case next month. More likely, the Fed will continue the process of normalizing rates.
Two of the seven seats on the board of governors are currently vacant. In addition, both Chair Yellen’s and Vice Chair Fischer’s terms will end in 2018. These openings will give Trump the opportunity to quickly fill positions and alter the Fed’s composition. As a result, the tone of the Fed is likely to become more hawkish over the medium term. While some have speculated that Yellen will resign given a Trump presidency, our expectation is for her to fulfill her term as chair. Given a strong labor market and firming inflation, our base case assumption is for one to two rate hikes in 2017.
5. Why is Trump’s potential turn toward trade protectionism a concern?
Over the past few decades, globalization has created tremendous benefits in terms of economic/profit growth, disinflation, and lower borrowing rates. Efforts to curb global trade would mean losing the net benefits associated with it and risking the creation of a self-reinforcing downward economic cycle. In addition, protecting uncompetitive domestic industries would come at a high cost to taxpayers, consumers, and businesses. What’s more, retaliation from trading partners would likely hurt corporate profits in competitive domestic industries, costing more wealth and jobs than those salvaged by anti- trade policies.
The problem with globalization is that the adjustment process has been poorly managed. Gains have not been equitably distributed, and low-skilled workers face chronically poor job prospects. However, increased globalization has taken an unfair amount of blame for job losses. For instance, advancements in technology have displaced more manufacturing workers than global trade has. Therefore, we believe the focus needs to be on enhancing the workforce’s skills/education to effectively compete in a globalized world.
6. How does Trump’s victory impact City National Rochdale’s outlook for equities and earnings?
A potential fiscal stimulus and the prospect of lower tax rates have an overall positive effect on the long-term outlook for S&P 500 earnings per share (EPS). For example, a 2% reduction in the corporate tax rate could potentially add approximately 3% to EPS growth on an annual basis to our current forecast for 2016 (see chart).
However, uncertainty regarding President-elect Trump’s leadership style, as well as the question of whether he will take actions to negatively impact global trade, could lead to heightened volatility.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice.
This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.
Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.
There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems, than developed markets.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Investments in below-investment-grade debt securities which are usually called “high-yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible.
Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases, and changes in the credit ratings.
Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, govern-ment agencies, and government-owned corporations located in more developed foreign markets.
Returns include the reinvestment of interest and dividends.
Investing involves risk, including the loss of principal.
As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.
Past performance is no guarantee of future performance.
Non-deposit investment products: are nto FDIC insured, are not Bank guaranteed and may lose value.
The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.