Like many Americans, investors and business leaders were surprised by the Trump victory in the presidential election. Most were probably finalizing 2017 execution strategies with an expectation that Clinton would win the White House. The notion of a Trump victory was probably only captured as a “risk item” with no real contingency plan.
But, here we are. The unexpected is now reality. I am advising my clients and my friends to move to Plan B quickly. If you had contingency plans, let’s review them. If you did not, let’s create them. Bottom line is there is no reason to sit still for four years. We must excel and profit under a Trump presidency.
To say the least, Trump is unpredictable. But, based on campaign messages that he repeatedly emphasized, here are some areas that may be ripe for profit.
1. Taxes/Business Organization. Trump promised an overhaul of the tax code. Sure, we hear that every four years. But, this guy has made tons with tax strategy. He may just be the guy to do it!
His proposals include reducing the number of tax brackets from six to three, revising tax deductions, and eliminating the estate tax altogether. But, I am particularly interested in his proposal to reduce the corporate tax rate from 35% to15%!
With that in mind, I am talking to clients about how their businesses are organized. Many business owners opt for an LLC because of the reduced formalities. However, if this corporate tax rate reduction happens, a corporation may be a better option for businesses that want to accumulate cash.
Remember, LLC’s typically receive pass-through tax treatment. Effectively, the income of the business is added to the personal income of its owners and the owners are taxed at their individual rates. For some, this rate is 33% or more. These businesses can preserve a lot more money by reorganizing as a corporation and paying 18% less in taxes. This may be even more important considering that Trump’s plan includes caps on individual deductions. Let’s keep an eye on this one.
2. Healthcare. You already knew we had to discuss Healthcare. Trump has consistently promised some form of an attack on the Affordable Care Act (ACA). This could mean a full-scale repeal – after all, the Republicans control Congress – or it could mean some significant modifications. Trump also appears to be a proponent of interstate sales of health insurance and more favorable tax treatment on premiums.
Collectively, this could mean a boost for several sectors of the health care industry that were expecting a real hammer blow under a Clinton precedency. I am paying particular attention to pharmaceuticals. Immediately following the election, big drug makers like Pfizer, Merck, and Mylan were up 3% - 8%! I am watching this sector for buying opportunities as the Trump plans materialize.
3. Banking Stocks. Banking stocks have struggled the last few years. But, these stocks saw a seven-day winning streak immediately following the election. There are a couple of reasons I believe banking stocks will continue to benefit from the Trump presidency: reduced regulations and higher interest rates.
Trump has indicated his intent to relax or overturn Dodd-Frank. Congress passed Dodd-Frank to rein in risky behavior by banks in the aftermath of the 2008 financial crisis. The law includes stringent mortgage-lending requirements and limited debit-card processing fees and created the Consumer Financial Protection Bureau. A roll-back of some or all of these restrictions could increase revenues for big banks and reduce their compliance costs. Together, these could lead to unexpected boosts in profits.
Not to discount the effect of Dodd-Frank, but most analysts suggest the biggest impact on bank valuations in the last few years has been the effect of historically low interest rates. Banks make money by investing and lending your money to others. In low interest rate environments, their revenue struggles. However, the Federal Reserve has started to act with a minor interest rate increase in 2015 and an expected bump in December.
Trump has indicated that interest rates have been artificially held low. He alleged that Fed Chair Janet Yellen, who was appointed by President Obama, has artificially kept interest rates low to create the façade that the economy is doing better than it is. With that type of language being on record, I am expecting Trump to pressure the Fed to continue interest rate hikes. As interest rates go up, so should banking stock values.
4. Real Estate. In the past, I have discussed three approaches to real estate investments with clients and friends: Traditional investment in properties, Real Estate Investment Trust (REIT) investments, and Tax Certificate investments. Profits under tax certificates are mostly influenced by state level activities. However, the first two investment strategies could be impacted by the Trump presidency.
In the last few years, I have suggested making the decision of whether to invest in a traditional property or REIT’s based on the investor’s tax strategy. Those seeking a tax shelter should look closely at traditional real estate investments. For, those with a long term growth objective that outweigh the need for tax shelter, I suggested REITs. I am still sticking with that basic rule. But, the grey area between the options may get wider under the Trump presidency. Although I think REITs need to remain in the mix, I think it may be time to ramp up traditional real estate investments.
REITs have seen whopping returns in the last few years. This is largely because they are viewed as “defensive stocks” in low interest rate environments. Income investors could make up for low income availability through interest rates with the high dividend payments of REITs. This drove the value of those REITs up year by year. As interest rates rise, some investors may move back to safer areas to park money, such as bond funds and CD’s. I don’t personally expect the rates rises to be impactful enough to totally eradicate REIT investments. But, there may be some impact.
The rising interest rates may also signal a closing window to acquire real estate with historically low cost of capital. Locking in deals with low interest rates now could prove profitable in the future. Every time the rate rises, an investor’s buying power goes down. So, if you are on the fence, or expecting the need for a future tax shelter, it may be time to take a good look at traditional investing.
5. Trump Index? Perhaps the biggest reason I have renewed my focus on hard real estate investments is because Donald Trump is a real estate investor.
I believe that what you do speaks so loudly that I can barely hear what you say. Trump has been a man who has taken advantage of every situation he encountered to advance his own interests. Some may say he has broken promises or mistreated other people along the way. I am not weighing in on whether the accusations are true. But, I am suggesting that I expect that he will be true to form as President. I am putting less emphasis on his campaign promises and more emphasis in following the maneuvers of his businesses. For the next four years, the Trump enterprise should be to business as Warren Buffet is to investors. What Trump Enterprises does, you do. I call it the Trump Index.
At the end of the day, I want you all to remember this. It is undeniable that some hateful people want to use the Trump election as a symbol of triumph. Many have struggled financially and hope Trump will punish others for their problems. But, let be honest: many of these folks are too busy celebrating to realize how to actually profit under the Trump presidency. They think the battle ended on November 8. The best way to prevail is to advance yourselves – ourselves – in the next for years. It is my goal to help us all do so.
On the other hand, there are millions who voted for Trump because they believe he will unlock corporate America and unleash its growth. So, if you supported Trump, let’s get busy getting the profit you voted for. If you were disappointed by the election, let’s get even by getting richer. Either way, let’s focus on our futures.