How will recent Trump appointees to the Presidential Cabinet impact our economy and markets?
How will the appointing of Peter Navarro, famed economist and strong opponent of Chinese economic policies, to the newly formed National Trade Council impact economic and foreign relations with China? Could it impact our US markets or on a personal financial level? How could other Trump appointees such as Steven Mnuchin and Gary Cohn affect our economic climate?
Your question is good, and while the outcome is unknown, one thing is for certain; there will be a steady stream of opinions from pundits and prognosticators about how the new administration will impact the stock market. Investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions. Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events, surprises relative to those expectations, may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.
Markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.
I'm sure you were looking for something a bit more specific -which I certainly could wade into- but any accurate (or inaccurate) forecast in the economy or markets would be attributable to luck as much as anything else.
Adam C. Harding, CFP
This is a good question. I'll address the potential impact of Peter Navarro and, more generally, Mr. Trump's strident critique of our trade relations with major trading partners such as China. Second, I'll offer up a few words on what his Health Secretary, Tom Price, might do for your tax sheltered saving.
If the new Trump administration uses its executive power (which it can) to implicitly or explicitly raise tariff barriers, it could easily spark a trade war. This is precedent for this from the late 1920s and 30s. Trump could provoke a "tit for tat" retaliation from targeted parties like China, Mexico, and Japan. Keep in mind, the Chinese ironically have been resorting to extraordinary measures to PROP UP their currency in the last few months. They will not be receptive to Trump's criticism that the Yuan is too low.
A trade war will hurt everyone, but the burden in this country will fall heavily on exporters. From a personal investment perspective, that argues in favor of smaller cap US stocks rather than S&P 500 companies. In fact, if you look at the rally in the US stock market since the election, you will find that smaller cap stocks (Russell 2000) have outperformed larger S&P 500 companies. Why? A Trump fiscal stimulus would benefit corporate America in the short run. A trade war, however, would offset a lot of that benefit through reduced exports. Smaller US companies export less. Thus, they would stand to benefit relative to large companies from Trump's trade and fiscal policies.
Tom Price, Trump's choice for Health and Human Services, is a strong foe of Obamacare. There is a strong likelihood that Price will entertain medical reform ideas from conservative think tanks. Look for an expansion of Health Savings Accounts (HSAs) in a Trump Administration. Larger HSAs are part of most conservative blueprints for health care reform. HSAs are a great tax shelter for those with disposable income. You can use it as a long term tax shelter with a little planning. See my article on the topic for more details.