Trump’s Tax Cuts and Your Clients’ Portfolios
With lower taxes high on new U.S. President Donald Trump’s to-do list, investors may well wonder if it’s time to adjust their asset allocations to take advantage of conditions popularly thought to benefit equities.
The answer, say financial advisors and other wealth industry players, hovers somewhere around “No,” “It’s too late” and “Maybe on the margins.”
Gregg Fisher is in the “no” camp.
“Changes in capital gains tax rates don’t give you good information about stock returns afterward,” says the head of research at Gerstein Fisher, an RIA in New York with $4 billion under management. “It may be a trend over a very long period that stock market returns are higher, but there are too many variables” — including “wealth effect” exuberance — “to be certain about it.”
Similarly, Fisher pokes at the notion lower corporate taxes will mean higher stock prices for public companies able to direct more money to innovation and expansion. “The idea is that taxes will come down from a maximum of 35% now to 15% under a Trump tax regime.” But Fisher says the effective tax rate for many of the biggest corporations “is already 15% to 17% after deductions.”
Fisher’s skepticism about a correlation between tax cuts and higher equities runs against conventional wisdom. “Put 20 people in a room over lunch and ask them what the stock market will do 12 months after a tax decrease and most will say stocks will go up,” says the asset manager. “We’re just not sure that’s true.”
Maybe more to the point, adds Fisher, tax-rate moves up or down shouldn’t trigger changes to tailored all-weather allocations.
“The general answer to the question ‘What should prompt a change in asset allocation?’ is a change in the investor’s personal circumstances, his or her comfort-level with potential volatility, and the timeline for needing the money,” says Fisher. “The big issue is getting asset allocation right, not taxes.”
Wayne Connors agrees with that general assessment.
“The most important decision an investor can make is how much stocks versus bonds to own,” says Connors, founder of Retirement Investor, a subscription-based portfolio model provider based in Glastonbury, Conn. “This holds true in any tax environment.”
In any case, Connors — who also runs an RIA in Hartford, Conn., that manages $800 million — says the now-waning bump in U.S. stocks since Trump’s election came largely in anticipation of lower taxes that may not come as readily as hoped for a Trump administration hampered by scandals, investigations and congressional push-back.
In plainer terms, lower taxes may already be priced into the stock market, and then some.
Caution also informs advisor Tim Scannell’s wait-and-see counsel to his clients.
“Whether the client is very confident Trump can push his tax plan or not” — and Scannell says his client base is split down the middle when it comes to Trump — “we’re telling them to hold off until we can sift through” actual legislation as opposed to election campaign pledges, says the Valparaiso, Ind.-based HighTower advisor.
Besides, like Connors and Fisher, Scannell says he doesn’t view tax rates “as a core decision-driver.”
Scannell, who manages $350 million, clarifies: “They’re important, but not enough to warrant changing the structure of a portfolio.”