Tough Financial Questions During A Trump Presidency

Inauguration Edition


The Most Challenging Questions to Ask Your Advisor this Quarter

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How do we plan for our personal taxes during a Trump presidency?

Given a Trump presidency and a Republican congress, how do we plan for personal taxes if tax rates may go lower?

 

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There are a couple of things to keep in mind, and the first is that we are not all being promised lower taxes. We're being promised lower tax rates, but how someone's total tax bill is calculated might completely change. How so? First, Congress is likely to encourage revenue-neutral changes. So if you watching this right now have lower taxes, somebody else might be paying more.

What we need to do is think about how the total tax calculation may change for a given client. And for many people it may not change much. For clients who don't have mortgages or mortgage interest, who donate smaller amounts to charity, and don't have a large amount of deductions, chances are they may save on their tax bill.

Who will it impact the most negatively?

Well a couple of people. Number one, folks who live in a high-tax state like Massachusetts, California, or Maryland. Residents of those states can generally deduct a higher amount on their federal tax returns due to the state tax deduction. If those deductions are limited, that may result in higher taxes at the federal level.

Number two, those with a windfall tax years, meaning someone sells their businesses or cashes out of a huge amount of stock options and winds up paying a huge amount of state taxes (or as we've always planned during those years, making larger than normal charitable contributions during those years). Bottom line - those who benefit from numerous itemized deductions may have their deductions limited.

Lastly, we need to see what happens with corporate tax reform and how that affects personal businesses. For example, for those with schedule C income, we need to see how tax rates change and what business deductions are allowed.

Here's the biggest consideration - an accountant who acts more as a proactive consultant than just a number-cruncher can be valuable. They can help talk through how you give, what you deduct, and how to structure your income effectively. My suggestion is to monitor the changes in Washington, but also plan to have an accountant who acts proactively and can help make sure you're reacting properly to any changes.

How should we prepare for inflation in a Trump presidency?

With the Trump election and the potential for infrastructure spending, how do we prepare for potential inflation?

 

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When it comes to inflation, there are a couple of things to keep in mind. The first is, you may hear this Spring that the government's measure of inflation has skyrocketed. This may make for big headlines, but keep in mind that a lot of the headline number is influenced by other factors, like the price of oil. And oil went from somewhere in the $50's in 2015 to somewhere in the high $20's in 2016, and at this point it's just back up to somewhere in the 50's. That adjustment from the 20's to the 50's based upon the governments measurement will seem like an enormous boost in inflation. But, oil is really just adjusting where it was two years ago.

There are a couple of factors that can spur on a bit more inflation and possibly higher interest rates. However, there are also numerous factors that could keep inflation low or even lead to deflationary pressures.

One of the factors that may lead to higher inflation is government spending, but keep in mind that Congress will likely want to offset any spending for infrastructure with cuts somewhere else. It's not going to be all Trump "borrow and spend," and we're going to need to offset that spending somewhere else in the government budget. One trend I'm watching is corporate spending. There is a historic amount of cash on corporate balance sheets, and if they suddenly start spending it that could lead to higher inflation.

Here's an example of how these factors influence each other- let's say Trump encourages more manufacturing by US companies to occur within the United States. Our unemployment figure is somewhere around 5%, so if we start to look at hiring hundreds of thousands or millions more people to do these manufacturing jobs, where are we going to find them? If we don't have policies that allow people to come in from overseas to work here in the US, then we need to pay people more (wage inflation.) That causes corporations to spend more, and an unintended side effect is that they need to charge more for their goods and services. Employees can renegotiate their wages so they can spend on higher-priced goods and services. All of these effects are inflationary. Even if corporations don't borrow but spend money they already have, that too can be inflationary.

On the flip side, a stronger US dollar can help offset some of that inflation. Why? Well, if the dollar strengthens, it decreases the cost of foreign goods, services, and materials purchased by US residents and companies.

Who are the winners and losers in a Trump Presidency?

Who are the winners and losers in a Trump Presidency? In the first few days or the first few weeks, markets reacted sharply.

 

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When Trump was elected, there were four sectors that were clear winners. These were banks, energy companies, pharmaceuticals, and industrial companies. Those that were going to benefit from a wall being built and government spending on infrastructure, those sectors really soared. Some sectors, on the other hand, went down - like utilities.

But as the new year hit, some of those sectors may have gotten beyond themselves and all it took was a tweet or two to knock down a sector or company. So as far as individual winner and losers, we'll have to wait and see.

Here's an example: pharmaceutical companies, who research and create new drugs, were under a lot of regulatory pressure from a potential Clinton administration.

Upon a Trump win, boom - pharmaceutical companies were in vogue again. However, much of the effects of lower taxes and easing regulation became "priced in," and what we saw in just a couple of tweets from Trump is that pharmaceutical companies may not have free reign over their pricing. So, prices fell again.

Another example is individual companies who contract with the government or manufacture in the US. Trump policies could influence them as well.

Banks may be the big winner in all of this. Yes, deregulation will help. The fact that a lot of presidential appointees come from Wall Street may influence policy-making in their favor. But there are other reasons. For example, regional banks aren't affected much by international trade. So they may be isolated from tariffs on foreign goods and services. Plus, if interest rates continue to go up, that's an enormous boon to the bottom line of lenders.

What changes under Trump are priced into the market already?

One of the greatest questions we're getting asked nowadays is with the stock markets soaring, with interest rates jumping, what's already priced into the market?

 

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James Mackintosh from the Wall Street Journal may have said it best - "It has taken markets just four days to price in four years of President Donald Trump." Meaning, all the talk of deregulation, infrastructure spending, tax cuts, and business deals became priced into the market rapidly.

What's not priced in at this point?

Any sort of backlash from a foreign country or region, whether it be economic, military-related, or through trade policy, may impact the United States. We in the US happen to be in a place of negotiating power economically, given how much our spending benefits the rest of the world. But we are not the only country who spends. We are not the only country that needs foreign goods and services. And if some of those countries decide to sanction the US, cut off trade, or retaliate against new policies, I don't believe that kind of volatility is priced into the market at this point.

What are we doing in client portfolios to prepare?

What are we doing in client portfolios, given this kind of environment?

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Diversification is key. A higher allocation to the US than foreign may be warranted more than it was prior to the election, given the potential for global volatility. And then a bit more important, factors like valuation and profitability of investments need to be taken into account. There will be winners and losers, and we want to diversify our portfolios with a focus on what can provide long-run value.

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Questions from Previous Quarters

Are you looking for one of our previous Quarterly Questions, or one you missed? Check out our Previous Tough Questions to ask Your Financial Advisor!