As we near 2017, one of our primary areas of focus is the connection between the investment markets and political uncertainty. This comes from two general sources:
- President-elect Trump and his new administration – the policies implemented and their likely impact
- Brexit – Britain is likely to invoke Article 50 in March, which is the tool to begin departing the European Union
Here are a few specific policy topics we are watching:
- Income Tax – Trump has promised to lower tax rates for corporations and individuals. A lower corporate tax rate will result in higher after-tax profits for companies and shareholders. At the level of personal tax, it is President-elect Trump’s hope that lower rates will eventually bring about higher levels of consumer spending (and thus more profits for companies).
- Trade Agreements – Trump has pledged not to consider signing the Trans-Pacific Partnership. It is likely that the investment markets will handle this with relative ease as it is not yet implemented and represents an enhancement to trade. More concerning is the possibility that President-elect Trump retreats from existing agreements, such as NAFTA. Companies have set strategies based on NAFTA being in place, and any disruption in this may cause concern among investors. It is also possible that a rescission from NAFTA would cause a “trade war,” translating into import tariffs or taxes.
- The Fed – Monetary policy has started to tighten as the Fed raises rates (finally), but they appear to be doing so in a halting fashion with starts and stops. This has only served to confuse investors as to the Fed’s intent.
- Profits – this year American companies started to see profit levels decline. Some of this decline is due to a fall in the price of oil (which continues) that hurt the profits of large energy companies. Another factor is the strengthening US dollar, which makes it more difficult for US companies to sell goods abroad.
The crystal ball sitting in the Sherpa offices is a bit murky, but it looks like we’ll have an interesting year ahead.
Lance Gunkel, CFP®, CFA
Chief Investment Officer