Many professional investors are excited about Trump 2.0. They like Trump’s plans to lower taxes and they are enthusiastic about the prospect of reducing regulations. That said, the good ship Trump and the investors who try to crew it may be facing some choppy water – created, in part, by crossing its own wake.
Trump’s Agenda
Donald Trump’s plans, based on campaign promises, are wide, varied, and sometimes contradictory. Some of the core objectives include:
- Applying tariffs on practically every country on the planet.
- Extending tax cuts he signed into law during his first administration.
- Reduce the size of government.
- Mass deportation.
- Increasing the debt ceiling.
The Economy Trump is Inheriting
An election exit poll by CNN found that 35% of respondents said the economy was “not so good” while 33% said the economy was “poor”. However, many economists consider the economy to be doing well. They point to the decline in inflation to 2.7%; low unemployment at 4.2%; and strong GDP of 3.1%in the third quarter.
“The U.S. economy is in very good shape — it has a strong underlying growth trend,” said Douglas Holtz-Eakin, an economist and president of the American Action Forum, a center-right think tank. “All of the risks are policy risks.”
The disconnect between economists’ figures and consumer sentiment is pricing. They remain stubbornly high and probably will do so for a long time.
Prices
Trump has said he would cut consumer prices. The numbers tell a different story. Analysis by economists and a report from the National Retail Federation see his plans having the opposite effect.
Tariffs are a key component of the president-elect’s agenda. He wants tariffs of 10-20% on almost all foreign goods. Furthermore, he has proposed higher tariffs of 25% on Canada; 25-100% on Mexico, and rates as high as 60% on China.
Trump contends that tariffs will aid American manufacturing and compensate for government revenues lost as a result of his proposal to extend tax cuts. However, the numbers do not add up.
In addition to tariffs, Trump’s plan for mass deportation could also elevate food prices. That is because many undocumented migrants work in agriculture and food processing.
Mass deportation would also reduce revenue from taxes paid by undocumented workers.
Taxes
Lawmakers on both sides of the aisle are loath to take tax savings away from their fellow Americans. That is especially true for those fellow Americans who are large campaign donors. So, there is likely to be widespread support in Congress for extending tax cuts signed into law in 2017.
The impact on the deficit may be the greatest obstacle to continuing the tax cuts. Extending the cuts would add $4.6 trillion to the deficit, according to the nonpartisan Congressional Budget Office (CBO).
For individuals, extending the cuts means the rich will get richer and the middle class will get a little something as well.
Households making $450,00 or more would get over 45% of the benefits of extending the law, according to the Urban-Brookings Tax Policy Center. The top 1% of households would save about $70,000, or 3.2% of their income. At the same time, middle-income families would save about $1,000 or 1.3% of their incomes.
Healthcare
One tax cut Trump is likely to let expire is found in the 2021 American Rescue Plan Act. The Biden-era law is set to expire at the end of 2025. It offers premium tax credits that reduce out-of-pocket costs of Affordable Care Act (ACA) health insurance enrollees.
Over 20 million Americans will see their health expenses increase by about $700 a year, if these tax credits expire, according to KFF, a nonprofit health policy group.
The American College of Physicians (ACP), the American Academy of Family Physicians, and the American Medical Association have all called for extending the tax plan.
“Before the tax credits were expanded to include middle-income people, many individuals and families who did not qualify for Medicaid were being priced out of coverage,” said David Pugach,
ACP vice president for governmental affairs and public policy.
Social Security
In addition to extending income tax cuts, the president-elect has proposed eliminating federal taxes on Social Security, tips, and overtime pay. However, revenue from those taxes is used to fund Social Security and other safety net programs.
As a result, Trump’s plan would accelerate Social Security’s insolvency, according to the Tax Policy Center (TPC). In turn, that would lead to reduced benefits for workers.
Social Security’s reserve funds would run out of money by 2031 according to the Committee for a Responsible Federal Budget. Consequently, benefits for enrollees would drop 33% by 2035.
Notably, those with the least to lose would lose the most. Households earning $32,000 or less are not taxed on the majority of their income. Therefore, they would get no benefit from the tax cut, according to the TPC.
Stock Markets
Wall Street is strewn (metaphorically) with the bodies of analysts, advisors, fund managers, and commentators who have tried to predict the markets. Which is a tough task in times of calm and stability. In the next administration, the body count is likely to rise considerably.
Most analysts see the economy continuing to grow, albeit at a slightly slower pace, and the stock market rising with that growth. However, the wildcards in that rosy scenario are the next administration’s policy moves and the actions of the Federal Reserve.
The biggest mistake investors make in times of turmoil or uncertainty is panic selling.
Vanguard, a global investment management company, looked at client behavior during one of the greatest financial upheavals in recent history: the COVID-19 pandemic.
Less than 1% of Vanguard clients sold stocks during the February 19 to May 31, 2020 timeframe of the analysis. During that period, the S&P 500 dropped 34% then bounced back 36%.
“Eighty-six percent of cash panickers locked in losses over the three-and-a-half-month period,” according to Vanguard. “Moreover, they missed out on the rebound, meaning nearly all of them ended up with actual returns that were lower than their personal pre-pandemic benchmark portfolio returns.”
Congressional Help
Implementing Trump’s plans will, in most cases, require Congressional approval. By and large Republican help has been easy to find. However, the recent dust-up over funding the government demonstrates that in the future that support may not be as easy to come by.
Republican House Speaker Mike Johnson’s team, negotiating with House Democratic leadership, crafted a budget agreement on December 17. The next day Trump and Elon Musk demanded that the deal be scuttled. Musk, who financed a quarter of a billion dollars of Trump’s campaign, even threatened to fund primary opponents of House members who voted for the bill.
The plan worked and the funding bill was defeated.
Trump then proposed a new spending bill with the addition of a proposal to raise or suspend the debt ceiling. However, it was defeated when 38 Republicans joined Democrats to oppose it. Following that a spending bill was finally passed.
Trump’s willingness to blow up a deal at the last minute and the regeneration of backbones by some Republicans make the course ahead less certain.
Perhaps when looking to the next year or the next four years, we should be guided by the words of Rep. Steve Womack, R-Atk. Who advised, “Stay tuned. Buckle up. Strap in,”
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