Tax cuts, regulatory reform, and a health-law repeal are on the table. Two Regions executives discuss what’s ahead and how to respond.
The strong stock market rally after Donald Trump’s election as U.S. president suggested that many investors were optimistic about the new administration. But now that Congress has gotten to work, what should you expect? Which proposed alterations to the financial landscape—from shifts in personal, corporate, and estate taxes to reduced business regulation and adjustments to or repeal of the Affordable Care Act—are likely to be enacted? And how will changes affect your own plans to, say, expand a business, buy a vacation home, or retire early? In a recent conversation, Alan McKnight, Chief Investment Officer for Regions Asset Management, and Kate Randall Danella, Head of Regions Private Wealth Management, offered their thoughts about how potential changes may affect clients.
What are clients’ biggest concerns during these early months of the new administration?
Alan McKnight: Clients crave stability, but we are waiting to see what will unfold. Volatility may increase as the market digests this transitional period, but the enormous rally at the end of 2016 was based on optimism about what’s to come. Concerns would arise if events don’t play out the way the market anticipated.
Kate Randall Danella: The new administration brings a different approach to policies and government. Given that President Trump comes from a business background, we don’t have a track record to help us hypothesize. But this administration is oriented toward action, so we can expect to learn more during this first year. Amid the uncertainty, it’s very important for clients to understand their goals and investment strategies so that they can pivot appropriately as we learn more.
If the proposed repeal of the estate tax happens, how will that affect clients’ estate planning? Will trusts continue to be important?
KRD: Under current law, estate, gift, and generation-skipping transfer taxes are unified—they all work together. A complete repeal would let people transfer assets of any amount freely to whomever they wanted, without transfer taxes. Partial repeal is more likely, eliminating estate and generation-skipping taxes so families avoid taxes at death, which was one of the more heated topics during the campaign.
The biggest concern is what may happen to the tax basis of inherited assets (which is currently stepped up to their value at time of death).
Changing the transfer-tax laws will be a Herculean effort and will likely be challenged. If it happens, there is a high probability that an estate tax could be reenacted one day. While today’s window of repeal is open, it’s a great time for clients to do holistic financial planning that includes their estate plans.
AM: I agree. There’s a long grind ahead to enact all of these changes.
KRD: And a change in the law that benefits one family could be quite challenging for another. Regardless of whether the estate tax is repealed, we believe trusts will continue to be a highly important vehicle, because trusts also can help provide asset protection and cash flow—as well as protection from creditors, who normally can’t seize trust assets, and protection, through trust provisions and trustee discretion, for beneficiaries who might not be ready to manage large sums on their own.
Should investors favor specific sectors that may benefit from the new administration’s policies?
AM: We’ll need to see more, to crystallize which industries may do well. For example, there has been a lot of talk about rebuilding infrastructure, but we don’t know yet to what degree that will occur and what kind of budget deficits may be considered acceptable.
How might international stocks be affected by foreign-policy changes?
AM: The U.S. election has been seen as part of the global trend toward populism and a more isolated approach to individual economies. An isolationist worldview could affect multinationals and would be challenging. It’s no surprise that in the fourth quarter, small-cap stocks were up almost 9% while the largest stocks gained less than half as much—because most small-cap companies are domestically focused. Still, if the economy improves, large caps with solid balance sheets and the capability for earnings growth are also likely to be rewarded.
What will happen if the corporate tax rate is reduced to 15%?
AM: We see that as giving companies the opportunity to grow earnings and help the markets. However, if the nominal corporate tax rate goes down but the effective rate is the same as it has been or higher, we won’t see much benefit.
The Federal Reserve seems poised to continue raising interest rates. Will that dampen the impact of efforts to boost economic growth?
AM: I don’t think so. Rates are going up slowly and shouldn’t have a major impact on the economy. If earnings growth picks up, companies will be better positioned to deal with higher rates.
But the housing market could be affected?
AM: Yes—but mortgage rates are still incredibly low, and housing is much healthier than even six years ago.
What should investors do now to prepare for the changes ahead?
KRD: We are asking clients to sit down with their Wealth Advisors to review their personal financial situations, individual goals, and unique risks. We’re asking clients about what’s going on in their lives right now—a parent who needs long-term care, a child with special needs, or a decision about when to sell your business, for example—that may be affected by what’s happening in Washington. With that information, we are putting together individual plans to help clients protect and grow their assets to achieve their financial goals. We encourage all clients to reengage in this process to ensure they have strong, durable plans in place for the future.
