With a new administration heading into Washington after an astounding Republican sweep, we turned to our trusted partners at Strategas, a leading research and advisory firm, for insights on how policy changes may impact markets. Dan Clifton, Partner and Head of the Washington Office for Strategas, shared his perspective.
Starting in January 2017, Republicans will hold a majority in both the House and Senate which gives the party flexibility to move legislation; in particular, on health care and tax reform.
We have a 75 percent probability of tax reform taking place under an all Republican government. This may have to wait until the second half of the year, but the process will start early in 2017. We want to stress that tax reform is very different from tax rate cuts. Tax reform is defined as the lowering of tax rates but existing tax deductions and credits are removed to pay for the cost of lowering tax rates. Central to this tax reform proposal is the lowering of corporate and individual income tax rates. On the corporate side, we see the tax rate being lowered to at least 25 percent, a one-time tax being placed on U.S. companies’ cash sitting overseas and a permanent shift to a territorial tax system. However, to pay for these tax changes, at least $1 trillion of corporate deductions and credits will be needed to pay for tax reform. On the individual side, Congress will try to move to a three-bracket individual income tax system, cut the capital gains and dividend tax rates to half of personal income tax rates, eliminate the Alternative Minimum Tax or AMT, and repeal the estate and gift tax. The current proposal is quite ambitious and will likely be scaled down over time. But tax reform will loom large over the 2017 policy landscape.
Pharma had a big win on election night despite scrutiny over drug pricing. A California initiative to limit drug pricing was rejected and the Republican sweep limits any real price controls from being enacted. But given high prices, we would not be surprised if Congress continues to shine a light on drug pricing issues.
Defense spending went positive on a year-over-year basis for the first time in September. Donald Trump has vowed to increase Defense spending by 15 percent and a Republican Congress can make that happen fairly easily.
Financials got less attention this election cycle, but they benefit from a Trump presidency. We expect changes could be made such as lifting the Systemically Important Financial Institution, or SIFI, designation for regional banks and easing regulatory requirements on insurers. The threat of a bank tax or financial transaction tax has been reduced to near zero. Student lenders should also benefit from reduced regulatory risk.
Energy and Infrastructure
Democrats have become the party of climate change. Environmentalists have pressured party officials to oppose building out energy infrastructure. More than 20 pipelines have been stalled or rejected since last November. ATrump presidency gets most of these projects up and running. There is a lot of talk about Trump and infrastructure. Highway infrastructure stocks are on fire today. But we think energy infrastructure is where the real rubber hits the road in a Trump Administration. We can also likely see a delay in the Clean Power Plan which regulates emissions.
Hospitals and Medicaid HMOs
Republicans are going to move on the Affordable Care Act (ACA) and while they are unlikely to take away health insurance for 20 million Americans, the proposals could reduce coverage and subsidy amounts which negatively impact health care service companies.
Delay of the Clean Power Plan and other deregulatory measures may slow the transition from fossil fuels to renewable energy.
There could be some disappointment with the highway infrastructure companies if they catch a bid on Trump. A Republican Congress is less likely to allocate money in this area and Trump’s proposal is really focused on tax credits for private infrastructure projects.
Immigration and Trade
We noted that Kansas City Southern is selling off on the potential for less business with Mexico via new trade rules. But also keep in mind that companies dependent on immigrant workers may suffer as well, as Trump will have the flexibility to impose immigration rules without Congress.
We hope this gives you a sense for what to expect from the markets in the new year. We will continue to monitor investment selections and will look for buying opportunities. Thank you for the continued trust you place in Westwood Trust.
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