Private Investment Mangement Portfolio Manager

What to Expect in 2017 After the Election

Now that the election is over, I’m getting calls asking—“What’s Next”  We have been listing to a variety of conference calls and presentations of what industry analysts think the outcome will be for 2017 and beyond.  I’d like to share the key takeaways from some of these calls.

Tax Holiday on Foreign Earnings  According to a recent report from Jeff Cox at CNBC  based on a study by Capital Economics, there is approximately $2.5 Trillion dollars in overseas earnings that may potentially work their way back to the U.S.  In addition to tax revenue, this money will be available for capital expansion, share repurchase, paying off corporate debt, dividend increases and acquisitions.  That’s a lot of money that could potentially make its way into the system and should be good for financial markets.

Decrease in Corporate Tax Rates The only two countries that have a higher corporate tax rate than the U.S. is Chad and Dubai.  Discussion is that corporate tax rates, if passed by congress, will drop to 15%.  Big boost to corporate earnings.

Drop in U.S. Tax Rates to 3 Brackets  Part of the discussion on the calls is the elimination of the affordable care act surcharge in addition to decreasing the marginal tax rates.  Some analysts are also predicting the elimination of the estate tax and the alternative minimum tax.  Expectations of a boom in consumer spending may be overly optimistic.  I read an interesting comment by Rick Golod, a market strategist that I’ve known for a number of years, that when gasoline prices dropped in 2014 to 2016 the savings were $250 billion but retail sales only increased 1.7%  A lot of that money went into savings and debt reduction. 

The Trump Cabinet  I can’t remember the last name (if at all) that we had such a collection of business people to run the country.  I have no idea if the same skill set that makes one successful in business works in government.  Several years ago I was fortunate to attend a conference in New York hosted by Goldman Sachs.  Gary Cohn was selected to be Trump’s director of the National Economic Council.  Mr. Cohn spoke to our group for about an hour.  He seemed down to earth with a lot of common sense. 

I don’t think that I’m going out on the limb by saying that the people that ran these companies very successfully have strong personalities and are great leaders.  We don’t know how the “team” will play together and if strong opinions will collide.  I’m looking forward to following the dynamics of the cabinet, especially on the economic side, for the next four year.

The rapid increase in interest rates may slow down  Interest rates on the 10 year treasury bonds rose substantially after the election.  Stories were circulating that China was dumping it’s treasuries because they didn’t like Trump.  It more likely seemed like institutional rotation into the stock market due to some of the points I mentioned above.  Interest rate differentials are still large.  Rates on foreign government bonds are substantially below rates on our 10 year Treasuries so foreign buying could potentially put a cap on steep rate increases.  On one of our calls the speaker made a point of comparing these to conditions to the Taper Tantrum and it took about four months for things to settle down.  The Federal Reserve said they were looking to increase rates (short term) three times in 2017.  The chief economist from Wells Fargo Securities, John Silvia, has a forecast of two increases.  John usually makes an annual visit to Scottsdale and his presentations are always informative.

Congress still has to pass the laws. These “feel good” measures still have to go through congress.  Too much debt and protectionism are the two themes that came out of the majority of calls that will create headwinds to proposals that are floating around.

There are potholes in Ohio   My wife recently visited her family in Akron and noticed that the turnpike was constantly being worked on.  A big infrastructure bill is being discussed, but details on how it’s going to be paid for aren’t out yet.  In 2014 a number of analysts thought that the Federal gasoline tax should have gone up to finance infrastructure spending but it never happened. 

 

Best wishes for a happy and healthy 2017

 

Mitchell Stillman

Managing Director-Investments

PIM Portfolio Manager

 

 

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