Tariffs, Taxes, and To Do's

Historically, the first year of a president's term has been a fairly average one for the stock market.  In his 2016 market analysis, Lee Bohl found that the first year of a presidential term yielded an average return of 6.7% from 1933 to 2015.  This is modest compared to the third year of a president's term which historically has earned the highest return at 13.5%, but signifcant compared to the second-year average return of 3.3%.  However, averages do not tell the whole story.  

In Trump's first term, we saw the S&P 500 soar in year one by over 19%.   Similarly, the first year of the Biden administration saw the S&P 500 grow by over 26% even though the administrations were drastically different in philosophies.  This time around, we’ve seen the Trump administration start off with a flurry of legislative activity.  While several orders have been met with resistance and pending lawsuits, it is worth looking into the ideas and orders that could impact you the most.

Tariffs

Tariffs were a major talking point leading up to the November election.   Even though Trump did most of the talking regarding tariffs - a tax imposed by one country on goods imported from another country - this ishardly a new idea.  Though the use of tariffs have been waining since the 1900’s, they have been used by regimes on both sides of the aisle.  The purpose of tariffs have traditionally been two-fold: to raise revenue for the United States government and to protect US industry.   In his 1902 State of the Union address, Theodore Roosevelt claimed that tariffs were the reason for much of America’s prosperity.  But as American industries grew, taxes began to overtake tariffs as a primary fundraiser for the government.  This meant the role of tariffs in the modern era were much more geared toward protectionistic policy.  Most recently, Trump imposed several tariffs in his first presidency on items such as solar panels, washing machines, steel, and aluminum.  Likewise, Biden raised or maintained tariffs on solar cells, lithium batteries, steel, aluminum, and medical equipment.  According to Goldman Sachs, the George W. Bush Institute, and the nonpartisan Tax Foundation, tariffs have historically resulted in a price increase of the affected materials.  However, tariffs have generally led to an increase in domestic jobs and American factory production.  If tariffs are enacted as currently threatened, products from fresh produce, alcohol, gas, cell phones, shoes, and pharmaceuticals could all be affected. 

Taxes

The Trump administration has floated several policy ideas related to taxes and there is a general expectation that several ideas will be agreed upon.  However, it won’t be a slam dunk that the president gets everything he wants.  The republicans hold narrow majorities in both the House and Senate, meaning House republicans can only lose the support of only one of their members if they want to pass legislation without the help of Democrats.  While certainly subject to change, some current propsals include:

• Making permanent much of the Tax Cut and Jobs Act 2017, which would include:
  1. Reduced income brackets
  2. Increase of child tax credit
  3. Increase in estate tax exemptions
• Eliminating taxes on overtime pay and tips
• Eliminating the Social Security windfall provision

To Do’s

As mentioned above, several ideas that are currently flooding headlines across the country are or will be challenged via judicial process.  These prolonged court cases can lead to some ideas being abandoned and some changed to make the approval process quicker.  For these reasons, we don’t recommend making wholesale changes to your portfolio or your financial plan because of something that might happen. If you don’t need a new washing machine right now, we wouldn’t recommend you go buy one just because it might be more expensive a year later when you need one.  However, there are a few things we do recommend you do:

• Review your financial plan including cashflow analysis, balance sheet and portfolio allocation at least annually
• Reach out with your questions and concerns, we are here to serve you and are able to provide tax and estate related referals
• Remember the stock market is an efficient machine that doesn’t care if you or the president are democrat or republican
• Stay calm and live the life you desire 
• Write a note to a friend, we could all benefit from a kind thought during the greyness of winter

Logan Bryant is a Senior Wealth Advisor with CogentBlue and can be reached at logan@cogentbluewealth.com.

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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