Financial adviser Michael Yoshikami warns that smart investors should consider the notion that the stock market’s honeymoon with President-elect Donald Trump just might not last forever.
"A couple of bad headlines and a higher than expected inflation report could turn this market around in a heartbeat," Yoshikami, the CEO and founder of Destination Wealth Management in Walnut Creek, California, wrote for CNBC.com.
“This euphoria flies in the face of a rising interest rate environment as well as the unprecedented record expansion now approaching 8 years and is already the fourth longest in the last 150 years. Given the cyclical nature of economic expansion and contraction,” he explained.
“Tax and deregulation issues, combined with a still low interest-rate policy by the Federal Reserve, have provided an environment which has boosted equity values in the United States. Why one might be tempted to embrace the euphoria as a long-term phenomenon, we think this would be misguided when looking at an intermediate and long-term timeframe,” he wrote.
He cited a trio of reasons for investors to be cautious:
- All of Trump’s campaign vows and rhetoric “are merely proposals – nothing has been implemented yet. There will be pushback from some in the legislative bodies that the proposals suggested are not neutral taxation balanced. In other words, the proposed policies will likely increase deficits and that is not a popular course of action especially among Tea Party legislators.”
- Stronger economic growth through reduced tax rates could trigger inflation. "Higher inflation increases financing costs for companies and individuals and is a headwind for economic growth," he warned.
- "The strength of the dollar could negatively impact U.S. corporate profits. Already, companies are beginning to warn about the earnings impact from the strength of the dollar. When the dollar strengthens, goods and services become more expensive to buyers from outside of the United States and this is a negative to corporate profits,” he wrote.
“Enjoy the current rally but don't expect it to continue. I believe there are simply too many headwinds including U.S. dollar strength and higher interest rates that will likely overcome a more muted tax reduction policy implemented by the Trump administration,” he wrote.
Others are more optimistic about Trump's potential.
Trump adviser Wilbur Ross told Newsmax TV that the president-elect's "very progressive" tax strategies will mean lower financial burdens for all companies and eventually "every single category of wage earner."
The WL Ross & Co. chairman and CEO told "Newsmax Prime" host J.D. Hayworth said Trump's deregulation plan will also help revive growth.
"Capital investment by corporations has been one of the big laggards in the recent very mild, weak recovery," Ross told Hayworth.
And that entire economic recovery will be kicked into higher gear by Trump's proposed corporate tax rate cut from the 35 percent maximum rate to 15 percent maximum, he said.
"The tax cut . . . in plain English means that anybody who's paying the full tax now as a business will get an immediate 30 percent boost to post-tax earnings," he told Hayworth.
"Very few companies have earnings growth of 30 percent in a year, so that's a wonderful thing and it's a permanent thing," he said, explaining how Trump will also slash taxes for all levels of wage earners.
"Every single category of wage earner, with one or two little flukey anomalies that'll be dealt with in the final legislation, gets a reduction," he added.
"A married couple with two children and a nanny earning $50,000 a year will get more than a 35 percent reduction. Same couple, same number of children having a nanny earning $75,000 will get a little over a 30 percent reduction. Same family structure earning $5 million a year will get around a 3 percent reduction," Ross said.
"It's a very progressive thing in the sense that the least percentage benefit goes to the higher bracket and the highest percentage benefit goes to the lower bracket," Ross said.
© 2023 Newsmax Finance. All rights reserved.