How to Invest in the Donald Trump Era

ICYMI: Donald Trump is our President and the Republicans are in control of both the House and Senate. If you did miss this, you may want to reactivate your CNN updates. Though much of the focus on Trump’s first 100 days in office has been on social issues and global alliances, the stock market has made substantial gains since his presidential victory.

Historically speaking, a Republican controlled White House, Senate and House of Representatives has meant good news for the stock market, though it’s not a guarantee.

“At First Long Island Investors, the team believes the positive market reaction was driven by certain campaign promises, including the potential to reverse aspects of the Obama regulatory policies that many believe had held our economy somewhat hostage,” said Robert D. Rosenthal, Chairman, CEO, and Chief Investment Officer.

Related Content: Investing With You. Investing For You.

Promises Promises

From the campaign trail to his first 100 days, Trump has made it clear that he wants to take the US to new economic heights. The following six Trump promises, which could change the domestic economic environment, provide reason to be optimistic:

  1. Major corporate tax reform: Trump has emphasized reducing the corporate tax rate to make the US more competitive globally and encourage domestic business investment. The goal is to promote productivity and economic expansion at a faster pace than that of the previous administration. Trump has indicated he wants to hit a 4 percent GDP expansion rate and FLI thinks 3 percent is reasonable this year and next if pro-growth initiatives are implemented. (The current expansion average of 2.1 percent has been stagnant since 2008.)
  2. Individual tax reform: Trump hopes to simplify the tax code (i.e., reduce the number of tax brackets from seven to three) and reduce tax rates, which should deliver some economic benefit to the middle class. He also plans to eliminate certain loopholes for the top 1 percent.
  3. Infrastructure: Investment in the country’s infrastructure would include initiatives like transportation, clean water, a modern and reliable electricity grid, telecommunications and security infrastructure. This will also add jobs.
  4. Business-Related Regulation: Trump wants to reduce the number and scope of countless unnecessary business-related regulations that eat up time and resources and divert dollars that could be reinvested back into the business. This should reverse conditions that have stifled business growth and in turn lead to better paying jobs. First Long Island Investors believes this will stimulate growth from a more confident private sector.
  5. Affordable Care Act: Though First Long Island Investors supports the provision of insurance to more Americans and those with pre-existing conditions, we also believe that modifications to or a repeal of the Affordable Care Act should benefit the US economy. It would create greater efficiency, increase competition amongst insurance providers and reduce the financial burden on individuals, insurers and health care providers. Furthermore, an effort will be made to reduce Medicare/Medicaid fraud.
  6. Border control: Trump is adamant about securing our borders and putting America first when it comes to jobs and safety. He wants to stem the tide of undocumented immigrants and illicit drugs through a wall and stricter provisions for entering the country, deporting criminal undocumented immigrants and creating a system for peaceful and constructive undocumented immigrants to remain but not with guaranteed citizenship. This will require the hiring of thousands to build the wall and beef up border patrol law enforcement.

Patience Will be a Virtue

It will take time, perhaps a lot of time, for these promises, or at least elements of them, to become reality. This could cause the high Trump supporters are on to wear off, and likely result in volatility in the equity markets.

Roadmap to Success

Tax reform and infrastructure build-out, coupled with repatriation and some deficit spending could pull our country out of the anemic state it’s been in for the last eight years. More rapid growth and tax reform are needed to spur on consumers, who make up about 70 percent of the domestic economy. Additionally, growth and reform would likely spur businesses to invest if Trump’s policies are implemented and encourage consumers to spend more which would lead to productivity and economic growth. However, if this doesn’t happen sooner rather than later, the result could be a very disappointed equity market.

First Long Island Investors’ Take

Our view for 2017 is one of cautious optimism given the embraced economic agenda of the new administration. In particular, we believe that tax reform, infrastructure investment and less regulation will unharness the productive, creative and entrepreneurial characteristics of Americans and American business.

However, the obvious lack of political experience by a group of successful business people and former distinguished military leaders making up much of President Trump’s cabinet, and his own inexperience will cause fits and starts and possible volatility. This, coupled with a Federal Reserve on the move with higher interest rates and a difficult geopolitical environment, leads us to underweight fixed income as we adjust client portfolios.

We encourage all clients to overweight our defensive strategies, which are those that protect on the downside while still having the potential for appreciation and to somewhat underweight traditional equities, with a focus on concentrated portfolios. We also look opportunistically at real estate and private equity investments, which may have superior return potential, despite generally having higher risk and less liquidity than other strategies.

Over the long-term, fundamentals ALWAYS matter in each asset class we invest in. Our disciplined approach in evaluating fundamentals is our beacon in striving to protect capital and providing you with the opportunity for reasonable long-term appreciation. We believe opportunity exists in defensive, traditional and private investments to reap solid returns over the long haul. However, selectivity and not buying the averages is likely to be important going forward.

Most Importantly…

Don’t let your emotions or “likes” dictate your asset allocation. Let us help guide your allocation to insure exposure to areas that over time have rewarded long-term prudent investors with a quality bias. As JFK once said, “Change is a law of life. And those who only look to the past or present are likely to miss the future.” In other words, change is a necessary ingredient to a successful future. We believe the political stage is now set to encourage economic change leading to better growth, entrepreneurialism and private sector confidence in America. However, there will be bumps along the way.

First Long Island Investors is here to guide you through those bumps—and highs—of the market. Set up a consultation today by calling us at 516-935-1200.