Does a Trump Presidency Put Municipal Bond Tax Exemption At Risk?

President-elect Trump has called for increased spending to rebuild infrastructure. This, coupled with calls for tax reform, has municipal bondholders nervous that the federal government will limit or end the tax exemption on their bonds as a way to partially pay for this program. Although possible, we do not believe this is probable for the following reasons.

Municipal bonds have long been the primary financing vehicle for infrastructure spending in the United States. The federal government has stayed largely out of the process, allowing states to price their own deals. The belief has been that this lowers net interest cost as it is more efficient to finance on the local level. Although the federal government could use the revenue, we think that ending the municipal bond tax exemption could lead to court challenges. While tied up in court, new projects might be delayed or canceled, leading to pressure on politicians. This, coupled with the increased borrowing costs as investors demand more yield for the volatility, would diminish the benefit of new revenues collected from municipal bonds.

Another reason we do not see this as probable is the negative impact on the largest buyer, the retail investor. According to the Securities Industry and Financial Markets Association (SIFMA), more than 40% of municipal bonds, totaling more than $1.6 trillion, are held by individuals. This number increases to 70%, or more than $2.6 trillion, when mutual fund holders (including money market mutual funds) are included. Many holders are elderly and rely on tax-exempt income for retirement. They constitute an active voting group that would be very unhappy with changes to its fixed income payments. In addition, they could seek legal recourse because bond deals were marketed and sold to them as tax-free.

muni-bond-holders

In conclusion, the increased costs associated with restructuring the bonds would likely be prohibitive. And even if a change occurred, the process would take years and the bonds that have already been issued would more than likely be grandfathered. In other words, all bonds issued before the tax changes would likely remain tax exempt, increasing the value of existing municipal portfolios. We will continue to watch this issue as more certainty around the incoming Trump administration’s plan of action emerges.

 

 

 

 

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Indices are unmanaged index and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. This research material has been prepared by LPL Financial LLC.

Market Impact of a Trump Presidency

Donald Trump emerged as the winner last night of a hotly contested presidential campaign and will be inaugurated as the 45th president of the United States on Friday, January 20, 2017. The transition to a Republican presidency and Trump’s rejection of politics as usual, which drew so many voters, naturally lead to questions about his impact on the economy and markets. Today on our blog we provide a high level overview of our thoughts of the significance of a Trump presidency.

ECONOMY

Does Trump’s win change LPL’s view on the economy over the remainder of 2016 and into 2017?

The election results have not changed our long-term outlook for the U.S. economy. We will continue to monitor many important economic indicators, including the Five Forecasters, the Current Conditions Index, and the Recession Watch Dashboard, and will keep you updated in the event of any changes to our views.

Will the election results cause a recession?

Elections do not in and of themselves cause recessions. Policies can, however, and we need to wait to see which policies Trump moves forward with and the details of those policies.

Our Recession Watch Dashboard continues to point to an overall low risk of recession within the next year.

What impact might the election have on overseas economies and markets?

Trade has been a major theme in this election, yet a president’s ability to impact trade directly and immediately is somewhat limited. Trump has been outspoken in favor renegotiating NAFTA terms and has been opposed to the TransPacific Partnership (TPP), which has little chance of passing. The Trump victory raises some concern across foreign markets about U.S. trade.

FED

Will the election results impact Fed monetary policy later this year and in 2017?

We do not believe the election results have changed the Fed’s outlook. Furthermore, we believe the Fed is much less sensitive to financial markets than most people think. As it stands, we believe the Fed is on course to increase rates at its December meeting, with another 2-3 increases in 2017. It would take a major market disruption or a change in the economic fundamentals for the Fed to alter this course.

EQUITIES & FIXED INCOME

Will the election result cause a bear market in equities?

Just as an election does not cause a recession, it does not cause a bear (or bull) market. Government policies alone do not change the market’s long-term trend, although they are a factor.

Shorter term, elections are rarely a harbinger for a sell-off, and when they have been, the election has not been the primary cause. In election years since 1952, the S&P 500 has returned an average of 2.5% in November and December and has been higher 75% of the time. From Election Day until Inauguration Day, the S&P 500 has averaged a gain of 1.0% and has been higher 69% of the time. The median return jumps to 3.0% because of a nearly 20% drop in 2008 that skews the average return, but 2008 returns were fundamentally driven by the recession, not Obama’s election. The bottom line is some near-term volatility is likely, but a massive sell-off absent an economic recession has never happened in the period between the election and inauguration.

Are the near-term results impacted by the party of the President?

There doesn’t appear to be much of a difference in equity performance over the short term. Since the election in 1952, the final two months of the year have returned 2.6% when a Republican wins and 2.4% when a Democrat wins. Looking at the largest drops the final two months of an election year in 2000 (Republican victory) and 2008 (Democrat victory) stand out, as the S&P 500 dropped 7.6% and 6.8%, respectively. Both times the economy was either in a recession (2008) or about to fall into a recession (2000) – which greatly contributed to the equity weakness. With the end of the earnings recession, improving consumer confidence, and the best quarterly GDP print in two years – we presently have an improving economic backdrop, which should help contain any large downside moves in equities the rest of 2016.

Which sectors would likely benefit under Trump?

Biotech and Pharmaceuticals: Although Trump has stated his desire to repeal the ACA and has favored drug re-importation from other countries, controlling drug prices is unlikely to be as high of a priority for him as it would have been for Clinton. As a result, biotech and pharmaceutical companies may get a bump. We believe the market may have overreacted to perceived policy risk and we continue to favor the healthcare sector, which has historically performed well after elections.

Energy: Trump is likely to be positive for fossil fuels. He has promised less regulation on drilling, along with expansion of drilling areas. The segment of the industrials sector that services the energy sector may also benefit.

Financials: The Trump administration is likely to be easier on financial regulation than Clinton would have been. Trump has indicated he would like to roll back financial regulations, including the Dodd-Frank legislation enacted as a result of the financial crisis. Trump has also suggested bringing back Glass-Steagall, which would separate traditional banking from investment banking, a move we see as very unlikely.

How will the election impact the dollar and bonds?

Dollar: Trump’s policies are likely to be relatively negative for the U.S. dollar. His comments on renegotiating U.S. debt held by foreigners may limit the attractiveness of bonds to foreign investors.

Bonds: We saw an initial Treasury rally as stocks sold off overnight, but yields have since moved higher. We expect there may continue to be additional volatility as markets digest the news, but we broadly believe markets may be pricing in a rise in deficit spending, which is pushing yields higher; though continuation of low rates overseas is an offsetting factor, potentially keeping rates somewhat range bound over the near-term.

Will Trump’s policies lead to a debt downgrade?

Trump had mentioned last spring the possibility of renegotiating our debt and paying back less than the full amount if the economy were to falter. This idea, if implemented, would almost certainly lead to a debt downgrade. However, he backed away from this idea a few days after he floated it.

More realistically, Trump has signaled higher deficit spending. While deficit spending was a contributing factor to the U.S. debt downgrade by S&P in August of 2011, it wasn’t the only reason. The main driver of the downgrade was the debt ceiling crisis, as Republicans demanded a deficit reduction package before they were willing to join Democrats in raising the debt ceiling. Divided government and partisan politics led to months of debate and an eleventh hour deal that avoided a default. With Republicans keeping control of the Senate and the House, a fight over the debt ceiling fight that could threaten the U.S. credit rating is unlikely.

COMMODITIES

What is the election impact on gold?

Gold can thrive in chaotic environments and the uncertainty surrounding Trump’s policies could offer some support to the commodity.

What is election impact on oil?

When discussing oil, it is important to remember that oil stocks and crude oil can have very different performance, even though investors often expect similar returns.

Trump’s victory is likely a positive for oil stocks, especially in the short run. He has promised reduced regulations on oil and gas production, which would improve profitability of existing projects and may result in a very marginal increase in U.S. production. Note, this may be a negative for energy prices.

VOLATILITY

Will volatility increase due to the election outcome?

We expect that market volatility will likely increase. Equity markets have experienced abnormally low volatility recently, in part because of central bank intervention. As those interventions decrease, volatility should increase. However, we view that increase as a healthy aspect of equity markets. The degree to which the election results impact volatility will depend a great deal on which policies are actually enacted as a result of the changes in Washington.

 

 

 

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. Because of its narrow focus, investing in a single sector, such as energy or manufacturing, will be subject to greater volatility than investing more broadly across many sectors and companies. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial LLC.

What Happens Historically After Elections?

As America heads to the polls tomorrow to elect our next leader, many questions have come up. The most logical from an investment point of view is what will happen to equities. We addressed this important subject last week in Could There Be A Big Sell-Off After The Election? Taking another look at this, today we’ll break down what has happened historically from election day until inauguration day.

Going back to 1952*, the S&P 500 has gained from election day until inauguration day in 11 out of 16 elections for an average return of 1.0%. The median return jumps up to 3.0%, as things are greatly skewed by the huge 19.9% drop during the financial crisis.

what-happend-from-election-day-till-inauguration-day

The reality is if the economy is on firm footing and not in a recession (2008) or falling into a recession (2000), most the time the returns have been rather strong for the S&P 500. Considering the economy currently is probably the best economy an incoming president has inherited since Clinton in 1992, this could be another plus for equities after this election.

Last, here’s another look at all the returns after elections since 1952.

market-returns-after-elections-since-1952

 

 

 

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. * Any data prior to March 4, 1957 is back-tested, as published by the index’s parent company, S&P DOW Jones Indices. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indices are unmanaged index and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. This research material has been prepared by LPL Financial LLC.

Cast Your Vote at the Polls, Not Your Portfolio

On “CBS This Morning”, Rob Kapito, President of BlackRock, counseled investors to keep the long-term in mind as they confront investing in an uncertain election season, drawing on insights from BlackRock’s latest Investor Pulse Survey.

This survey shows the election is looming large in the minds of investors. It finds nearly two-thirds of Americans say the election has impacted their investment decisions over the past year. About one-third feel the election poses a threat to their financial future.

Source: BlackRock

Did Comedian Louis C.K. Compare Donald Trump to Hitler?

 

The answer to that is yes! In an email blast to his fans, Louis C.K. announced the next episode of his web series “Horace and Pete,” and the comedian added a long postscript asking readers not to vote for Trump.

Add Louis C.K. to the growing list of celebrities to publicly criticize Donald Trump.

Below is the full text of the email postscript.

P.S. Please stop it with voting for Trump. It was funny for a little while. But the guy is Hitler. And by that I mean that we are being Germany in the 30s. Do you think they saw the shit coming? Hitler was just some hilarious and refreshing dude with a weird comb over who would say anything at all.

And I’m not advocating for Hillary or Bernie. I like them both but frankly I wish the next president was a conservative only because we had Obama for eight years and we need balance. And not because I particularly enjoy the conservative agenda. I just think the government should reflect the people. And we are about 40 percent conservative and 40 percent liberal. When I was growing up and when I was a younger man, liberals and conservatives were friends with differences. They weren’t enemies. And it always made sense that everyone gets a president they like for a while and then hates the president for a while. But it only works if the conservatives put up a good candidate. A good smart conservative to face the liberal candidate so they can have a good argument and the country can decide which way to go this time.

Trump is not that. He’s an insane bigot. He is dangerous.

He already said he would expand libel laws to sue anyone who “writes a negative hit piece” about him. He says “I would open up the libel laws so we can sue them and win lots of money. Not like now. These guys are totally protected.” He said that. He has promised to decimate the first amendment. (If you think he’s going to keep the second amendment intact you’re delusional.) And he said that Paul Ryan, speaker of the house will “pay” for criticizing him. So I’m saying this now because if he gets in there we won’t be able to criticize him anymore.

Please pick someone else. Like John Kasich. I mean that guy seems okay. I don’t like any of them myself but if you’re that kind of voter please go for a guy like that. It feels like between him and either democrat we’d have a decent choice. It feels like a healthier choice. We shouldn’t have to vote for someone because they’re not a shocking cunt billionaire liar.

We should choose based on what direction the country should go.

I get that all these people sound like bullshit soft criminal opportunists. The whole game feels rigged and it’s not going anywhere but down anymore. I feel that way sometimes.

And that voting for Trump is a way of saying “fuck it. Fuck them all”. I really get it. It’s a version of national Suicide. Or it’s like a big hit off of a crack pipe. Somehow we can’t help it. Or we know that if we vote for Trump our phones will be a reliable source of dopamine for the next four years. I mean I can’t wait to read about Trump every day. It’s a rush. But you have to know this is not healthy.

If you are a true conservative. Don’t vote for Trump. He is not one of you. He is one of him. Everything you have heard him say that you liked, if you look hard enough you will see that he one day said the exact opposite. He is playing you.

In fact, if you do vote for Trump, at least look at him very carefully first. You owe that to the rest of us. Know and understand who he is. Spend one hour on google and just read it all. I don’t mean listen to me or listen to liberals who put him down. Listen to your own people. Listen to John Mccain. Go look at what he just said about Trump. “At a time when our world has never been more complex or more in danger… I want Republican voters to pay close attention to what our party’s most respected and knowledgeable leaders and national security experts are saying about Mr. Trump, and to think long and hard about who they want to be our next Commander-in-Chief and leader of the free world.”

When Trump was told what he said, Trump said “Oh, he did? Well, that’s not nice,” he told CBS News’ chief White House correspondent Major Garrett. “He has to be very careful.”
When pressed on why, Trump tacked on: “He’ll find out.”

(I cut and pasted that from CBS news)

Do you really want a guy to be president who threatens John McCain? Because John McCain cautiously and intelligently asked for people to be thoughtful before voting for him? He didn’t even insult Trump. He just asked you to take a good look. And Trump told him to look out.

Remember that Trump entered this race by saying that McCain is not a war hero. A guy who was shot down, body broken and kept in a POW camp for years. Trump said “I prefer the guys who don’t get caught.” Why did he say that? Not because he meant it or because it was important to say. He said it because he’s a bully and every bully knows that when you enter a new school yard, you go to the toughest most respected guy on the yard and you punch him in the nose. If you are still standing after, you’re the new boss. If Trump is president, he’s not going to change. He’s not going to do anything for you. He’s going to do everything for himself and leave you in the dust.

So please listen to fellow conservatives. But more importantly, listen to Trump. Listen to all of it. Everything he says. If you liked when he said that “torture works” then go look at where he took it back the next day. He’s a fucking liar.

A vote for Trump is so clearly a gut-vote, and again I get it. But add a little brain to it and look the guy up. Because if you vote for him because of how you feel right now, the minute he’s president, you’re going to regret it. You’re going to regret it even more when he gives the job to his son. Because American democracy is broken enough that a guy like that could really fuck things up. That’s how Hitler got there. He was voted into power by a fatigued nation and when he got inside, he did all his Hitler things and no one could stop him.

Again, I’m not saying vote democrat or vote for anyone else. If Hilary ends up president it should be because she faced the best person you have and you and I both chose her or him or whoever. Trump is not your best. He’s the worst of all of us. He’s a symptom to a problem that is very real. But don’t vote for your own cancer. You’re better than that.

That’s just my view. At least right now. I know I’m not qualified or particularly educated and I’m not right instead of you. I’m an idiot and I’m sure a bunch of you are very annoyed by this. Fucking celebrity with an opinion. I swear this isn’t really a political opinion. You don’t want to know my political opinions. (And I know that I’m only bringing myself trouble with this shit.) Trump has nothing to do with politics or ideology. He has to do with himself. And really I don’t mean to insult anyone. Except Trump. I mean to insult him very much. And really I’m not saying he’s evil or a monster. In fact I don’t think Hitler was. The problem with saying that guys like that are monsters is that we don’t see them coming when they turn out to be human, which they all are. Everyone is. Trump is a messed up guy with a hole in his heart that he tries to fill with money and attention. He can never ever have enough of either and he’ll never stop trying. He’s sick. Which makes him really really interesting. And he pulls you towards him which somehow feels good or fascinatingly bad. He’s not a monster. He’s a sad man. But all this makes him horribly dangerous if he becomes president. Give him another TV show. Let him pay to put his name on buildings. But please stop voting for him. And please watch Horace and Pete. – Louis C.K.