From all the information available at this time, we are most likely looking at a positive year for equities in 2017. For fixed income securities, 2017 appears to be heading towards negative returns for the year! Please note, the Trump administration is fortunate to inherit the strongest economy since 2008: Unemployment is at the lowest since 2006, interest rates are low and should rise slightly and business are performing better than they have in years.
None of these factors take into account the Trump Administration. We expect three big initiatives from the new administration: First, tax reform: tax rates are coming down for both corporations and wealthy Americans, while tax rates for the lower income and middle income appear to be unchanged. Beyond that, we do not have enough information to make an intelligent determination due to the fact that both President Trump and the House GOP have different styles of tax reform in their proposals. Remember, Obamacare was changed greatly from what Obama described initially and the stimulus package was smaller and different than first presented and both initiatives occurred when the Democrats controlled both the Presidency and Congress. So, the exact details of Trump tax reform will play out later and speculating now won’t help with maximizing your returns.
Second, we expect Obamacare will be “repealed.” The repeal of Obamacare will not mean that the main features of Obamacare will disappear or that Obamacare will disappear in 2017. The pressure is on for continuing with the lifting of pre-existing conditions and allowing children to continue on their parent’s plan through the age of 26. Beyond that it is too early to predict what the new health care system will look like. I expect that politics will require a vote to repeal but the effective date of the repeal will not take effect until a new national health plan is in place.
Third major initiative is a large fiscal stimulus package to rebuild America’s bridges, roads, water systems and other infrastructure projects. Exactly what that will look like will be worked out after Congress convenes in 2017. Whatever the process the size should be in the range of $1.4 trillion over a 10 year period. We expect interest rates to rise, unemployment to continue to drop and the US economy to continue to rise.
All three initiatives should help equities to rise and fixed income securities to drop. Most of your portfolios have laddered bonds so the interest rate rise will not hurt the bonds as long as they are held to maturity. The value of the bond portfolios will drop but as long as the bonds are not sold prior to maturity you should not lose money. We also believe value stocks will continue to outperform growth stocks for the next six months. So, while we do anticipate changes in 2017, now is not the time to panic. Your portfolios will be adjusted sometime in 2017 to reflect these three new initiatives as they become clearer.