It is often said that the only two things certain in life are death and taxes. To that we might add a third certainty…uncertainty. This is especially true for 2017 as we enter it with a Republican in the White House and Republicans controlling both houses of Congress. While speculating is a fool’s game, we would like to share some thoughts about the New Year.
It is highly likely that we will see tax reform at both the corporate and individual levels, but it is also likely that President Trump will have to bargain not only with the Democrats, but with some members of his own party. Thus, the final product will be different from the proposals advanced during the campaign. We keep our clients and friends up to date through the ProVise Bullets. If you would like to receive the semi-monthly Bullets, visit the website (Provise.com) and request them via email.
A new health care law is also in the offering. ObamaCare can be repealed, repealed and replaced, or simply amended. We believe that the repealing and replacing option is the most likely as even Mr. Trump has said he wants to keep the provision allowing insurance for children up to age 26, along with precluding insurers from excluding those with pre-existing conditions. Medicaid has been a contentious issue here in Florida because the Republicans in Tallahassee didn’t want to expand Medicaid under ObamaCare; rather, they preferred block grants which would allow the state to manage the Medicaid process on its own. Expect these block grants to be part of the new law.
Mr. Trump has also indicated he wants to spend more money annually on the military, which will likely come to pass. As it did during the Reagan years, this should make defense contractors very happy. He also wants to spend up to $1 trillion on infrastructure around the country. This will face greater opposition, but he will get some part of it as many roads, bridges, ports, etc. are in dire need of repair or replacement. The “shovel ready” projects were already done during the Obama administration, so this will take at least a year to trickle into the economy. Nonetheless, this will be good news for the construction industry.
The 2017 economy will not be affected in any major way by the legislation that passes this year, but there could be a significant impact in a variety of ways going forward. For 2017 we expect Gross Domestic Product (GDP) to be better than 2016, but still less than 3%. A recession does not appear to be on the horizon. As for corporate earnings, they will begin increasing again after being down most of 2016. This may not translate into a significant increase in the stock market because it is at the high-end of fair valuation already. Unless something strange happens, look for a single digit increase in the market. Be prepared for a 10-15% correction at any time during the year, but it should be a cleansing of the market, not the beginning of a bear market.
Rising interest rates, which will put a great deal of pressure on bonds and other interest sensitive investments, will be a big story. We are likely seeing the end of the bull market in bonds that began back in the early 80s and, if this happens, bondholders may see negative returns, even after considering interest payments.
Employment numbers will continue to be good but not as robust as they have been in the past and the unemployment number is likely to drift down slowly. Because of tax cuts people are likely to spend more and that is important since the consumer represents about 70% of our GDP. With increased government spending, higher oil prices, and increasing wages, the threat of higher inflation could be a drag on the economy. Just like Goldilocks’ porridge, 3% inflation tastes just right. A higher rate is a negative as the Fed would raise interest rates faster than currently anticipated, and as we’ve seen the past few years, a lower number holds back growth. There are many reasons to be cautiously optimistic. Do not overreact to events in the short run. Instead take a long term view.
The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and are subject to change.
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