As president-elect Donald Trump prepares to take office on January 20, investors around the world are wondering about how the new administration will affect their finances. Since no one has a crystal ball to foresee the future, investors should consider a range of possible scenarios, and assess the risks associated with each one, as well as the potential opportunities.
First of all, the new Republican administration and Congress could pass a tax reform bill that would benefit U.S. businesses and high-earning corporate executives. The Trump administration might also move to reduce regulations on financial institutions, giving them more options to generate revenue and grow potential profits.
Stocks in oil and gas companies could benefit from Washington’s increased support of exploration, drilling, refining and pipeline transmission capabilities. Manufacturing and construction equities could also see a boost if a national infrastructure investment bill is passed by Congress and signed by the new president.
But not all stocks would be winners under this “pro-business” scenario. Repeal of the Affordable Care Act (ACA) or “Obamacare” is a stated priority of the new administration. However, it likely will take time to decide what program, if any, should replace its key provisions. As a result, insurance companies, hospital systems, medical equipment businesses and other providers may face changes in reimbursement that could affect their revenue and profitability.
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One risk associated with this scenario is a possible rise in inflation. Interest rates have remained at historic lows since the “great recession,” but lower taxes, increased infrastructure spending and changes to healthcare regulations could all change that situation. A rise in inflation could impact the nation’s housing markets, higher mortgage rates make it more expensive to purchase a home. That could have a negative effect on real estate brokerages, and residential, builders, developers and lending companies.
A more restrictive U.S. immigration policy or a move to uproot undocumented aliens already living here could also have negative repercussions for the housing and mortgage markets, as well as other types of U.S. businesses. Many multinational companies draw from a global talent pool, and shift executives from one country to another. Some U.S. technology companies also strive to increase their “human capital” by attracting talented individuals from foreign countries. A change in U.S. visa rules might limit the hiring options for many types of businesses.
The Trump administration may also decide to renegotiate current foreign trade agreements or withdraw from the North American Free Trade Agreement (NAFTA) covering Mexico and Canada. Any action along those lines could have a significant impact on U.S. multinationals by raising the cost and the risks of doing business in those countries. They would also affect companies in India, China and other emerging markets now doing business in the U.S.
For example, imposing import tariffs on foreign goods to encourage U.S. manufacturing would raise the cost of new cars, refrigerators, computers and other products for U.S. consumers. There is also a risk of other countries imposing anti-U.S. regulations that could cripple the supply chain for manufacturing, retail and wholesale companies.
Finally, there is also the possibility that the Trump administration’s policies could cause a backlash in the U.S. and abroad. Conflicts could potentially occur over healthcare insurance, oil and gas drilling, foreign trade, immigration or other business, social and geopolitical issues.
For investors, now is the time to look carefully at the possible scenarios for the stock market in 2017 and consider the risks as well as the potential for growth. It remains to be seen what the Trump administration will actually do and how the nation and world react.
In the meantime, investors should consider the importance of having a diversified portfolio of assets that might include bonds, real estate, cash and alternatives as well as a variety of stocks. That approach is particularly important when saving for long-term goals, such as a comfortable retirement or a college for your children. Stay focused on your objectives, recognize your tolerance for risk, and talk with your financial advisor about how to position your portfolio for the years ahead.
Andrew Menachem, CIMA®, is a Wealth Adviser at The Menachem Group at Morgan Stanley in Aventura