As we go to press with this issue of InvestorView, Donald Trump is in his early days as the 45th president of the United States of America. Trump’s campaign and election broke every rule, upended every precedent and ignored every best practice, and his presidency is not likely to be any different. Salena Zito, writing in the pages of The Atlantic during the campaign, crystallized the disconnect of opinion about him when she concluded that “the press takes him literally, but not seriously; his supporters take him seriously, but not literally.” It is simply hard to know which proposals are literal, which are test balloons to gauge public or congressional opinion and which are merely early morning tweets. The lack of specificity in many of his proposals makes it difficult to analyze the potential impact of his election on the economy or financial markets. And yet we shall try.

The big question is, which of the proposals made by Candidate Trump will be implemented by President Trump? How will he prioritize a wide range of policy initiatives? A critical consideration is the degree to which Congress will support the president’s legislative agenda. Conventional wisdom dictates that, with the Republican Party controlling both houses of Congress, President Trump should have an easier time passing legislation than his predecessor. And yet there is nothing politically conventional about his proposals. Trump may have been elected on a Republican ticket, but he campaigned on many issues that do not comport with Republican orthodoxy. The president’s party may control a majority of seats in Congress, but it is not clear that he controls a majority of votes. The relationship between President Trump and Republican Speaker of the House Paul Ryan will influence or even determine how much of his legislative agenda becomes law.

In this article, we consider the preliminary implications of President Trump’s initiatives that affect the domestic economy and markets. This is the president’s area of greatest comfort and the target of his closest attention: It plays to his own experience and strengths and is reflected in the composition of his nominees for cabinet positions, many of whom share his background in business. We focus in particular on four related areas: trade, immigration, deregulation and taxes. In each area, we attempt to assess the likely direction of policy changes, the ease with which President Trump can accomplish that change and the potential impact on the economy and financial markets.

Trade

Trump’s website states that he intends to “negotiate fair trade deals that create American jobs, increase American wages, and reduce America’s trade deficit.” These objectives are rooted in the belief that unfair trade deals benefit other economies at the expense of U.S. jobs and wages. Even prior to his inauguration, Trump carried through on this broad commitment by haranguing specific companies (usually via Twitter) that were considering relocating operations abroad.

And yet it appears that the president will not implement trade policy solely by focusing on one company at time. In order to accomplish his tripartite objective of more jobs, higher wages and smaller trade deficits, Trump has committed to abandon or renegotiate the trade agreements that cover most of U.S. trade with the rest of the world. As of this writing, he has already followed through on his campaign promise to not participate in the Trans-Pacific Partnership (TPP), a free trade zone that would have encompassed 12 pacific economies (notably excluding China) accounting for 27% of global GDP. The agreement was signed in February 2016 but has so far only been ratified by Japan. Abandoning TPP was a central point of Trump’s campaign and a rare (if strained) point of agreement between him and Democratic nominee Hillary Clinton.

Although not explicitly targeted by Trump, it seems equally likely that the Transatlantic Trade and Investment Partnership (TTIP) will also stall. The TTIP would have liberalized trade between America and the European Union, but the combination of Britain’s vote to leave the EU and Trump’s election has landed a one-two punch from which this trade agreement is unlikely to recover.

Electing not to participate in an unratified trade deal is easy – the North American Free Trade Agreement (NAFTA) is a different matter, as previous presidential candidates have discovered. NAFTA has been an issue in every presidential election since it was ratified in 1994. During the 2008 presidential campaign, Candidate Obama pronounced that “we can’t keep passing unfair trade deals like NAFTA that put special interests over workers’ interests.” He vowed to renegotiate NAFTA and unilaterally take the United States out of the agreement if Canada and Mexico refused to consider better terms for U.S. workers.

Trump has repeatedly stated that NAFTA has resulted in the loss of American jobs – and particularly manufacturing jobs. The nearby graph partially supports that claim. When NAFTA became law in 1994, there were 16.9 million manufacturing jobs in the United States. As of December 2016 that figure had dropped to 12.3 million, implying a loss of 4.6 million jobs since trade with Mexico and Canada was liberalized. Yet when compared with the overall labor force, manufacturing jobs have been in decline since World War II. Cause and effect are notoriously difficult to prove in economics, but in this case the loss of manufacturing jobs – both in absolute and relative terms – is almost certainly due to the transition of the U.S. economy to a greater reliance on information and services as opposed to manufacturing and agriculture. These are long-standing secular trends, and renegotiated trade agreements are not likely to turn this tide.

The US Manufacturing Labor Force

Renegotiating trade deals is hard work and requires cooperation from Congress as well as trading partners. The president has more unilateral flexibility when it comes to imposing tariffs on countries that he believes are engaging in unfair trade.

The Trading with the Enemy Act of 1917 allows the president to impose tariffs “during time of war,” a rather loose prerequisite, as the U.S. is always at some level of war somewhere in the world. In August 1971, President Richard Nixon relied on this act to impose 10% tariffs on all goods imported to the United States, citing the Korean War (technically not over, although a cease-fire has held since 1953). The International Emergency Economic Powers Act of 1977 defines emergency even more broadly and allows the president to use tariffs on another country during a “national emergency,” another ill-defined condition. Could Trump define a loss of jobs to China and Mexico as a national emergency and act accordingly?

Trump’s website explicitly refers to the Trade Act of 1974, which allows for tariffs in cases where there is “an adverse impact on national security from imports.” Once again, the breadth of that definition allows the president a wide latitude for unilateral action. The act permits tariffs of up to 15% on any imported goods for up to 150 days, with congressional approval required for an extension beyond that period.

There are, therefore, quite a few actions that President Trump can take in his early days in office. In addition to not participating in unratified trade agreements, he can unilaterally impose tariffs with plenty of legal backing, and we expect him to do so on targeted Chinese goods, as a warning shot across the bow, if nothing else. Provisions within NAFTA prevent Trump from levying tariffs on Mexico, and he will need to rely on congressional support to renegotiate or repeal NAFTA. Here is where the story gets interesting. Speaker Ryan is a champion of free trade, and statements in support of TPP and TTIP remain on his website. Indeed, the economic benefit of free trade has long been part of the Republican Party platform, and President Trump may encounter more opposition from Republicans than Democrats in his attempt to redefine “fair trade.”

Should Trump succeed in imposing tariffs or renegotiating current agreements, the impact on the U.S. economy is meaningful. Strictly measured, trade is a small part of American GDP. Over the past 12 months (through November 2016), exports have totaled $1.4 trillion vs. imports of $2.2 trillion. That net export deficit of $800 billion amounts to about -4% of GDP, compared with the 70% of GDP that is personal consumption. A narrower trade deficit actually improves the measurement of GDP, as imports are a deduction to the calculation.

US Exports by Destination

US Imports by Origin

Trade measures, however, do not take place in a vacuum. To intentionally misquote Isaac Newton, for every action there is an opposite action, but it need not be equal. The United States is not the only country that can impose tariffs or trade barriers, and other countries would likely retaliate with trade measures of their own, to the detriment of the U.S. labor market. The U.S. Department of Commerce estimates that 11.5 million American jobs were supported by exports in 2015, and damage to export markets would quickly translate into the loss of American jobs, an ironic outcome given the overarching vision of establishing trade policies that support employment.

Tariffs also lead to rising prices. For example, if Trump were to carry through on his threatened 45% tariffs on Chinese imports, the price of a wide variety of products on the shelves of Walmart would likely increase within days. Rising prices, in turn, lead to inflation and lower standards of living. It is perhaps for these reasons that Wilbur Ross, the incoming secretary of commerce, has referred to tariffs as a negotiating tool – a starting point rather than an ending point in trade negotiations.

History is clear that no one wins a trade war. In an attempt to protect American industries, the Smoot-Hawley Tariff Act of 1930 imposed tariffs on over 20,000 imported goods. Trading partners retaliated in quick course, both export and import markets collapsed, unemployment tripled, and what was a minor recession became a Great Depression. President Trump will take what unilateral action he can to carry through on his campaign commitments on trade, but care in enacting certain trade policies will be necessary to prevent substantial damage to our own economy and labor markets.

Immigration

When Trump descended the escalator at Trump Tower on June 16, 2015, to announce his candidacy for president, he highlighted immigration reform as a central point in his campaign. In a succinct statement that remains on his website, Trump commits to “prioritize the jobs, wages and security of the American people.” As with trade issues, jobs are the central focus of his immigration proposals.

Trump’s promise to build an “impenetrable physical wall” on the Mexican border quickly became one of the more evocative images of the presidential campaign. Some analysts question whether or not he will be able to fulfill this marquee commitment, although throughout the transition period he has maintained his intent to curtail illegal immigration from Mexico. Curiously lacking from the debate on this subject is the fact that legislation already exists to support this proposal, making it relatively easy for the new administration to execute.

In George W. Bush’s second term, both the House and the Senate passed the Secure Fence Act of 2006. The bill gained Senate approval by a rather wide margin of 80-19, including yes votes from then-Senators Joe Biden (D-DE), Barack Obama (D-IL) and Hillary Clinton (D-NY). The bill goes into deep geographical detail about the precise location of the fence and specifically requires “2 layers of reinforced fencing, the installation of additional physical barriers, roads, lighting, cameras, and sensors,” with the goal of preventing “all unlawful entries into the United States.” Furthermore, the law requires the secretary of the Department of Homeland Security to report annually to Congress on progress toward these objectives, with a deadline of May 30, 2008, to complete the fence.

Congress appropriated $1.2 billion to begin the project, but once that money was spent, construction ground to a halt, as did annual reports. Substitute the word “wall” for “fence,” and the Secure Fence Act sounds identical to what Trump wants to achieve. Republican control of Congress makes it easier for President Trump to resurrect a (likely renamed) Secure Wall Act of 2017 and request funding to carry it through to completion.

This is but one example of standing immigration legislation that has either been unimplemented or underfunded. We are a nation with many laws, and presidents have the prerogative of prioritizing how those many laws are executed. During his second term, President Obama used executive orders to delay certain aspects of immigration law that Trump has vowed to reverse. The Deferred Action for Childhood Arrivals (DACA) order allows immigrants who entered the country as minors to apply for deferred action on deportation proceedings, as long as they have committed no crimes. The Deferred Action for Parental Accountability (DAPA) order allows a similar approach for parents of children who are legal residents or citizens. Both orders allow prosecutors the discretion to delay deportation proceedings indefinitely, although they do not create a path to full citizenship.

Both DACA and DAPA are orders, not laws. Executive orders come into existence through the stroke of a pen, and they can disappear with the stroke of a pen. President Trump is likely to rescind many of Obama’s executive orders for deferred immigration action and can furthermore use the same method to direct various immigration authorities to step up the enforcement of existing laws without congressional approval.

Senator Jeff Sessions of Alabama was instrumental in shaping Trump’s positions on immigration, and, as the incoming attorney general, he is in a position to help implement those positions. Sessions has a reputation as a hardliner on immigration and has consistently opposed amnesty or a pathway to citizenship for immigrants who arrived in the country illegally. His oversight of the nation’s 58 immigration courts will enable him to accelerate deportation hearings and clear out the backlog of cases created by deferred action orders.

The Trump administration can implement many of its immigration policies through executive orders (or the reversal of previous orders) and the oversight of various agencies. Resetting the number of visas allotted to each country, however, or an outright ban on immigration from certain countries, requires congressional action, as does any immigration initiative that requires funding. A Republican Congress is likely to accede to such legislative requests from the White House, but with some subtle differences. The GOP agrees with tighter border security and the more effective enforcement of existing laws, but Speaker Ryan in particular is an advocate of legal immigration and creating a way for immigrants who are in the country illegally to “get right with the law.” Ryan and other Republicans take great care not to characterize this as amnesty, but the position seems softer than that espoused by both Sessions and Trump. At the end of the day, the president has enough unilateral authority and support from Congress to accomplish most of his immigration goals.

Immigration is not just a political, ethical, legal and moral issue: It is a critical economic issue as well. In the long run, mature economies need immigration to fuel growth. The math is simple. The ability of any economy to grow is the sum of two variables: growth in the labor force plus the productivity of that labor force. Economies with shrinking populations struggle to grow, as we are seeing play out in Japan and southern Europe. About half of the U.S. labor force growth comes from the birth rate of natural citizens, but the other half comes from immigration. In essence, as fertility rates within the country decline over time, we make up for that by borrowing the fertility rates of other countries.

Population of the USA

The nearby graph puts this into stark relief. The green line is our population growth from 1950 through 2100, based on current trends in fertility and immigration. The red line represents a future in which net immigration falls to zero, leading to a peak in population around the year 2042. Immigration is unlikely to decline to zero, particularly as the Trump administration has a stated goal of encouraging the sort of immigration that contributes to economic activity. Nevertheless, the diversion of these two lines illustrates how important immigration is to secular economic growth.

Both sides of the debate agree that our immigration laws and procedures are ripe for reform, although they differ on the shape of that reform. The preceding paragraph illustrates how important it is for the long-term economic vitality of the nation that this reform be effective. We have to get immigration right, but we also have to get immigration, right?

Regulation

President Trump’s view on regulation, like so much else of his platform, hinges on the job market. In his own words, Trump intends to “end the radical regulations that force jobs out of our communities and inner cities. We will stop punishing Americans for working and doing business in the United States.”

Trump has proposed a freeze on new federal regulations until departments conduct a cost-benefit analysis of all existing regulations, prioritizing those that are not closely related to health and safety for repeal. He would furthermore require that a rigorous cost-benefit analysis be conducted for any proposed agency rules. As examples of what he believes to be regulatory overreach, Trump has singled out three rules for quick review and likely dismantling.

His first target is the Environmental Protection Agency’s (EPA’s) Clean Power Plan, which is intended to combat climate change by limiting the emissions of carbon dioxide from power plants. The final version of the rule was announced by President Obama in August 2015 and was immediately challenged in court by 27 states on the grounds that the EPA lacked legal standing to issue such a broad rule without an act of Congress. By a 5-4 vote split along ideological lines, the Supreme Court stayed implementation of the rule on February 9, 2016, just four days before Justice Antonin Scalia passed away. To add to the political intrigue, the case was heard by the D.C. Court of Appeals in September 2016, absent its chief justice, Merrick Garland, who recused himself once President Obama nominated him to replace Scalia on the Supreme Court. The D.C. court has yet to issue a ruling.

The EPA’s Waters of the United States rule is likely dead in the proverbial water as well. This regulation defines which lakes, rivers, streams and so forth fall under the jurisdiction of the EPA for protection against pollution, and opponents consider it a regulatory land grab that would restrict the economic activities of farmers, ranchers and builders. Opponents furthermore argue that this is but one example of an agency claiming regulatory powers that only Congress can grant. The rule was in legislative trouble even before the election and is now almost certain to be overturned in the early days of the Trump administration.

Now that Trump has moved into the White House and appointed Scott Pruitt to head the EPA, all of this political maneuvering is likely sound and fury, signifying nothing. Trump has openly questioned the reality of climate change (or at least the human cause of it), and Pruitt, as the attorney general of Oklahoma, repeatedly clashed with the federal department he now heads over its legal standing to issue emissions standards.

Finally, Trump is likely to carry through on a repeated campaign promise and lift the Department of the Interior’s moratorium on issuing new coal mining permits. Montana Congressman Ryan Zinke, Trump’s nominee for secretary of the interior, opposed the permit suspension and is likely to lift the freeze once he assumes office. Zinke has furthermore supported the construction of the Keystone Pipeline, a project that could be revived in the early days of the new administration.

President Trump has repeatedly committed to repeal and replace the Affordable Care Act, colloquially known as Obamacare. He will find this more difficult to overturn than the narrower regulatory rules summarized in the previous few paragraphs. The act’s impact falls on a much broader portion of the population, the law has been in effect for almost seven years, and Obamacare has already reshaped the health insurance industry. We expect a Republican-controlled Congress to consider amendments to the existing legislation, but further analysis is beyond the scope of this essay. We will certainly return to this topic in future commentaries.

President Trump’s commitment to deregulation is reflected throughout his cabinet appointments. Furthermore, there is close alignment between the White House and Congress on the broad issue of deregulation. In his Blueprint For America, Speaker Ryan devotes 31 out of a total 57 pages to the case for modernizing the nation’s regulatory framework. We believe that Trump will get all the support he needs – from his cabinet and Congress – to fulfill his commitments related to deregulation.

It is difficult to analyze specific regulatory issues without taking a political position. People of reasonable disposition and goodwill may come to very different conclusions about the necessity of a particular regulation. Yet at the aggregate level, the threat that regulatory creep poses to the American economy and business environment is a real and present danger, and the threat falls most heavily on smaller businesses that do not have the resources to comply with ambiguous, overlapping and even contradictory regulations.

Consider the nearby table, which ranks the U.S. against other economies on the ease of doing business. As the left-hand column shows, the United States ranks a respectable eighth on the list, seemingly proving that the regulatory burden is not that onerous. When we deconstruct the results, however, we find that the U.S. scores that highly solely because it offers easy access to capital through a mature banking system and financial market, and also offers a clear path to bankruptcy and restructuring through Chapter 11 of our bankruptcy code. Contrary to F. Scott Fitzgerald’s claim that “there are no second acts in American lives,” there are plenty of second acts (and third, and fourth …), and a well-developed bankruptcy code deserves the credit for the ability of American entrepreneurs to fail multiple times along the path to success.

Ease of Doing Business Ease of Starting a Business

Yet when we consider the ability to start a business, the United States ranks 51st, behind such entrepreneurial hotspots as Macedonia, Azerbaijan and Armenia. It is difficult for small businesses in particular to navigate the regulatory maze, and we welcome a less complicated approach to regulation in this country.

We readily acknowledge that regulation must balance the demands of corporate America and the need to protect the public and natural resources. At the same time, a commitment to more rational regulation would likely benefit corporate earnings and American businesses.

Taxes

As part of his campaign manifesto, Trump pledged to “reduce taxes across-the-board, especially for working and middle-income Americans.” His tax plan simplifies the code to three tax brackets, with limitations on deductions to partially offset the revenue implications of lower tax rates for most taxpayers. The tax plan put forward by Speaker Ryan differs slightly from Trump’s but is close enough that personal tax reform is likely to move forward this year. My colleague Brad Dillon covers the implications of Trump’s tax proposals for individuals, estate planning and wealth transfer in another article in this issue of InvestorView. In the paragraphs that follow, we focus on the president’s corporate tax proposals and their implications for the economy and markets.

Trump’s corporate tax initiatives are, once again, framed by his desire to boost job growth in the United States. He intends to “eliminate special interest loopholes, make our business tax rate more competitive to keep jobs in America, create new opportunities and revitalize our economy.” The statutory federal corporate tax rate in the United States is currently 35%, and closer to 40% once state corporate taxes are taken into account. As the nearby graph illustrates, it is difficult to deny that this level of taxation is a competitive disadvantage compared with other countries. According to the KPMG data series from which this chart is constructed, the only country with a higher corporate tax rate is the United Arab Emirates at 55%. Indeed, reforming the U.S. corporate tax rate is an issue that has historically attracted bipartisan support, although in the teeth of a campaign it is hard for a Democratic candidate to espouse a position that seems to benefit large companies.

2016 Global Corporate Tax Rates

Trump proposes lowering the federal statutory tax rate from 35% to 15% and applying that same rate to pass-through entities such as sole proprietorships, partnerships and S corporations. The House tax plan is slightly less generous, imposing a 20% corporate tax rate and taxing pass-through structures at 25%.

The wide deviation between domestic and international corporate tax rates creates an incentive for companies to relocate operations (and earnings) outside the United States. Companies pay taxes on profits generated abroad to the country in which they are earned, but they do not pay U.S. taxes on those earnings until they are brought home, at which point they pay the 40% statutory rate shown in the previous graph (with a credit for foreign taxes paid). This creates two perverse incentives: First, companies seek to book as much earnings as possible at lower tax rates outside the United States, going so far as to acquire a foreign company and move corporate headquarters away from the United States (so-called inversions). Second, the tax code encourages companies to keep accumulated earnings outside the United States, thereby avoiding (or at least delaying) the imposition of U.S. taxes on those earnings.

Corporate inversions – relocating headquarters to another country through a merger – attracted a lot of negative attention during the presidential campaign. Indeed, Clinton’s website still uses the Pfizer-Allergen merger as an example of how corporations “shortchange taxpayers by billions of dollars every year.” But inversions are more of a symptom than a problem: They are a predictable, logical and even responsible consequence of the tax code, and a natural consideration for any management team that embraces its obligation to maximize return to shareholders. Closing the gap between U.S. and foreign corporate tax rates will reduce the incentive to move operations abroad in an attempt to exploit that gap.

Corporate America holds an estimated $2.5 trillion of accumulated earnings outside the United States. President Trump has proposed a repatriation “holiday,” during which time this cash could be returned to the United States at a preferential tax rate of 10%. The House plan calls for a lower repatriation rate of 8.5%. The intent is to bring cash back onto American balance sheets, and the hope is that this cash is then reinvested into American jobs. There are essentially only four things that a company can do with cash: It can reinvest in the business (including hiring), return money to shareholders by repurchasing shares, pay dividends or simply leave the cash on the domestic balance sheet. The Trump administration would like for companies to spend that cash on new jobs, but any of these four broad applications represents an improvement over the current state of affairs in which the cash is stranded abroad.

The House tax plan also introduces a destination-based tax approach in a further effort to encourage domestic production. Under this plan, goods would be taxed based on where they are consumed instead of where they are produced. In other words, exports would not be taxed at all, as they are consumed outside the United States, where imports would be taxed upon arrival. This is not terribly different from the tax structures in place in many countries that impose a value-added tax (VAT) on consumption. The House plan is light on the details of how this might be implemented, particularly as it relates to industries that rely on imported materials that are otherwise not available domestically. Although the intent of this plan aligns neatly with the president’s desire to encourage domestic job growth, the complexity of implementing a destination-based tax has prompted President Trump to dismiss the idea, at least preliminarily.

An important aspect of the House corporate tax plan relates to the tax treatment of interest expense and income. Under the current tax code, companies can deduct the interest they pay on corporate debt, while individuals pay tax on interest income at ordinary tax rates. In the simple example depicted nearby, consider a company (ABC Corporation) that issues a bond with a 3% yield and pays a combined 40% federal and state tax. Because ABC’s interest cost is deductible, the tax-adjusted cost of its debt is 1.8%. The Johnson family holds this bond in a non-sheltered account, receives the 3% yield and pays the top marginal rate of 43.4% on that income (39.6% income tax plus the 3.8% Medicare surcharge tax). The Johnson’s after-tax return on that bond is therefore 1.7%, not much different from ABC’s tax-adjusted interest expense of 1.8%.

Current Tax Code House Proposal

The House proposal would eliminate the deductibility of corporate interest payments at the company level, so ABC would no longer be able to deduct interest payments as a business cost. At the same time, the plan would lower the Johnson family’s tax rate on interest income to 16.5%. Assuming that the Johnsons wanted to earn the same 1.7% after-tax return on their investment, the cost of debt for ABC would drop to the 2.0% shown on the right-hand column of the table.

Under the House plan, taxable bond investors should be willing to accept lower rates of pre-tax return, since a lighter tax burden leaves the same amount of money in their pockets after tax. Corporate issuers should therefore be able to issue debt at lower interest rates, offsetting much of the negative implications of losing the ability to deduct interest payments. Reality is likely to shake out somewhere between the two simple scenarios outlined in the preceding table, largely due to the fact that many buyers of corporate debt (such as pension funds, endowments and foundations) already pay no tax on corporate interest income because of their tax-exempt status. That leads us to conclude that corporate tax burdens are not likely to fall as much as depicted in the table, as large tax-exempt investors will be unwilling to suffer the implied drop in income.

The proposed changes in the deductibility and taxability of corporate interest alter the relative pricing of corporate and municipal bonds. Under the current tax code, investors in municipal bonds earn interest free of federal income tax, a substantial advantage for investors in higher tax brackets. Municipal bond yields reflect that tax advantage and would likely rise if the advantage is reduced. At the same time, the proposed reduction in tax on corporate interest income makes corporate debt more attractive for taxable investors, potentially reducing demand for municipals even further.

As the old saying goes, the devil is in the details. We believe that municipal bonds will continue to play a role in the portfolios of investors in higher tax brackets, but a change in tax structure would lead us to revisit how we allocate portfolios to corporate and municipal debt. We will have more to say and write on this topic as those details unfold.

Conclusion

Any change of control in the White House and Congress introduces uncertainty, risk and opportunity into the marketplace, and that uncertainty is only heightened by the unprecedented nature of this particular election. As outlined in this commentary, there are many issues on which President Trump can make quick progress toward his goals by issuing executive orders and directing his cabinet members to prioritize initiatives within their respective departments. The White House is, however, not completely in step with traditional Republican orthodoxy on other issues, such as trade. It remains to be seen whether Ryan or Trump will be more persuasive in setting the agenda in these areas where disagreement lingers.

The equity market has responded well to the outcome of the election, anticipating that the combination of deregulation and lower taxes will boost economic activity and corporate earnings. The S&P 500 rallied 5.0% between Election Day and year-end and added another 1.5% in the first few weeks of January. At the same time, the bond market is reflecting the fact that tax cuts and tighter trade deals will likely lead to higher deficits and inflation. The benchmark 10-year government bond yield rose from 1.86% on Election Day to 2.47% on Inauguration Day, its highest level since 2014. The unpredictability of this administration leads us to conclude that, whereas many of the proposals laid out by the White House and Congress should benefit business and investors, financial markets are likely to remain volatile.

Discipline and patience are always the hallmarks of successful investing. Their importance is heightened in periods of change and uncertainty. We believe that the ultimate objective of investing – the preservation and growth of our clients’ wealth – remains unchanged, and we will continue to follow and analyze the early days of the Trump administration in pursuit of that objective.

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