Love him or hate him, Donald Trump is your 45th President. Besides the big looming question about what his Presidency is going to do for the nation’s immigration and healthcare situation, there is also his effect on the stock market. Will Trump’s presidency help, hurt or do nothing for the stock market? Let’s look at a few theories.
First, let’s let the facts speak for itself.
Dow posts best week in 5 years after Trump wins presidency
The Dow is up a whopping 5% since November 7, 2016. That says a lot. Warren Buffett became the second richest man in the world again, after the election results were announced. His net worth increased by close to $2 Billion, as his holdings saw nice gains on US exchanges.
Buffett after the election also personally said that he expects the stock markets to only rise for the next 10, 20 and even 30 years. He argued that the markets were efficient enough to run on their own, and would do the same regardless of whether it was Trump or Clinton at the helm.
However, Buffett did touch upon the fact that Trump’s strong stance against liberal trade agreements with China and Mexico could hamper the progress of the U.S. economy, if Trump’s future actions mimicked his strong opinions.
Further, Buffett did say that removing exempts from trade agreements will be very tough to do for the U.S. President, despite both the house and senate having majority Republican support.
Why Trump may be good for the stock market?
There are a few key points that allow some to strongly argue that Trump will help the markets rise. They are;
Trump wanting to reduce corporate tax from 35% to 15%
This will be a drastic move. If it does happen, you will see markets posting record single day gains on the day it happens. Such a massive cut in corporate tax will mean that companies post higher margins, higher EBITDA and higher EPS. Corporations will also be able to pay back debt sooner, with money they will otherwise pay the tax man with.
But, such a drastic reduction in corporate tax might be very difficult to actually accomplish, even with the President’s might behind it.
Trump wanting to reduce regulatory pressure on corporations
Fewer regulations will mean that the ease with which businesses carry out their business will be much improved. After the 2008 sub-prime mortgage crisis, a key banking regulation in the Dodd-Frank bill was put in place, in 2010, after two years of careful analysis and dissection of the crisis. This bill currently imposes heavy regulations on how the banking sector goes about its business.
Trump, in his signature brash style mentioned that he would “get rid of” the Dodd-Frank legislation during his campaign. Now, after winning the presidency, his team announced a more polished version of the same opinion, stating that they will “dismantle” the legislation.
While not all of the legislation can be dismantled or gotten rid off, changes can be made to it. Any drop in regulation will mean that new opportunities will open up for banks.
Banks romped in gains on the day Trump was elected president. Wells Fargo was up close to 8% and Bank of America and JPMorgan Chase were up about 5% each.
Trump wanting to make it easier for companies to repatriate with overseas cash
Apple, Google, Cisco, Microsoft and other American tech giants have billions of cash shored up all around the world. Why? Because such earnings earned abroad will be subject to a harsh 35% tax when brought home to the U.S. Trump wants to make that easier by allowing such companies to bring home the cash, after paying a minimal 10% tax.
Notably, President Bush in 2004 did something very similar by dropping repatriation tax to 5.25%, resulting in a whopping $312 Billion being rushed back to the U.S. Analysts estimate that American companies have about $1.5 Trillion in cash shored up abroad, all cash that can come home if Trump makes it easier to do so.
Such a massive cash infusion will most definitely benefit the stock market or at least help the companies involved post impressive market capital gains.
Why Trump may be bad for the stock market?
Trump is a businessman. He is also a businessman who strongly believes in American businesses being successful when they are helping the American people, not sub-contractors and companies in other nations.
His holds most of his grudges against China, a nation that he even wants labeled as a currency manipulator. Trump is also infuriated by the fact that the trade deficit with China accounts for nearly half of America’s total trade deficit. Trump also blames China for America’s loss of almost one third of its manufacturing sector job loss, thanks to China joining the World Trade Organization in 2001.
Trumps wants all of this to change and change drastically. How will he do it? He will do it by imposing heavy tax restrictions on American companies that make their products overseas. For example, Ford had announced that they are building a $2.5 Billion automobile plant in Mexico, creating 3,800 jobs. Trump might impose a 35% tax on cars that are made in this plant and then brought to be sold in the U.S. Such a move will not only wipe out the cost advantages of building in Mexico, but actually make it a nightmarish episode where Ford might have made those cars more feasibly in the U.S. itself. The same scenario might precariously apply to all American companies with manufacturing bases in China as well.
To sum it all up, one just can’t predict what Trump will do for the stock market. One will have to wait and see how it pans out. We will have to see how aggressively Trump pursues his campaign goals and if he does, how warmly they are received in Congress.
Until then, all you can possibly do is believe in the efficiency of a stock market and invest, continue to invest or continue to hold mutual funds, ETFs or value companies. The rest will sort itself out.