President-elect Donald Trump's victory, along with Republicans maintaining majorities in Congress, has taken many by surprise. While some segments of the broad U.S. stock market reacted favorably to the election results (e.g., Financials and Industrials), other segments did not (e.g., Utilities and Consumer Staples). It's quite possible that a certain level of uncertainty and volatility will continue as the new administration takes shape and specific priorities are outlined going into 2017.
What does the recent market activity signal for planning purposes and navigating a new environment with Donald Trump as President? First, we encourage investors to keep this short-term volatility in perspective. If investment portfolios are structured properly, in line with investment goals (i.e., personal risk tolerance, the time horizon for when withdrawals are needed, and the magnitude of those withdrawals), and a mechanism exists to actively adjust portfolios to changing market conditions, then this election-related volatility should have little impact on the ability to achieve longer-term investment goals. In other words, it’s important to stay the course as there will always be uncertainty and bouts of volatility.
One area that received a fair amount of attention leading up to the election was taxes with almost polar opposite proposals coming from the two candidates. Donald Trump's theme relating to tax policy during the campaign was focused on tax cuts, simplifying and consolidating tax legislation, and eliminating certain unpopular and somewhat controversial areas of the tax code.
Specifically, he has proposed a reduction in the number of income tax brackets from seven to three (most recently a proposed high rate of 33%), a large increase in the standard deduction, eliminating the Alternative Minimum Tax (both for individuals and corporations), eliminating the 3.8% Medicare surcharge on investment income, eliminating the estate tax and gift tax, and reducing the corporate income tax rate to 15%, to name several key proposals.
These proposals are generally favorable to investors relative to current tax legislation, and it's pretty clear that Donald Trump and Republicans are going to push for a more favorable tax environment over the next two years. This environment can impact current planning considerations and strategies that investors have established to balance tax management and investment management. In general, these two areas are often at odds due to the fact that some tax planning strategies can potentially impact longer-term investment performance (e.g., avoiding selling investments at a gain in order to avoid paying capital gains tax) and vice versa (selling a security at a short-term gain but face a high short-term capital gains tax). A more favorable tax environment can allow for more flexibility when investing while reducing the tax penalty for being active and making adjustments to investment accounts (i.e., reducing the tax trade-off associated with investment decisions). Furthermore, if taxes are repealed, additional planning designed to avoid certain taxes, for instance, the Alternative Minimum Tax or estate tax, may be unnecessary which can eliminate costs (and time) associated with that planning. Finally, it’s impossible to know the potential longer-term impact that more favorable tax policy can have on the broad economy, which further highlights the need to apply an active management approach and be flexible with your planning.
At Manning & Napier, a key part of our job will be to inform clients of the new tax policy when it's enacted and highlight key provisions that can impact investments and planning considerations. More importantly, we will work closely with clients to build this tax information into our annual planning services to help clients understand and navigate the tax landscape to stay on track and focused on achieving investment goals.
Investments will change over time. Past performance does not guarantee future results. All investment strategies involve risks and there is no guarantee of a profit, or protection against a loss. Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.
SMA-BLOG102 (11/16)
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