What The Trump Presidency Means For The Stock Market
Two Factors That Play an Important Role
Dear investor,
I usually don’t pay much attention to politics because, most of the time, it feels like a soap opera and doesn’t really impact the long-term performance of my stocks.
However, every now and then, I make an exception - especially when policies are set to have a major impact on businesses. That’s why today’s article is all about cutting through the noise and focusing on what truly matters for you as a shareholder during the Trump presidency.
I’ll break it down to the big picture and highlight the two key factors that will have the most significant impact on most stocks.
Before we dive in, here are a few things to keep in mind:
You can only be 100% certain about a law after it has been passed. Until then, it’s all about probabilities - what’s more or less likely to happen.
Ignore social media commentary entirely. Most of these posts are designed to grab clicks, not to educate or provide well-researched information.
The truth is, most laws won’t have a significant positive or negative impact on stocks. The complexity of a domestic economy means that many industries and interest groups are involved, leading to compromises. Often, one law offsets another, so policymaking isn’t a “head-through-the-wall” approach by a single guy.
President Trump may say a lot, and the media often exaggerates even more (facts tend to ruin their narratives). But the only thing that truly matters is the actual law that gets passed.
For accurate information, skip the headlines and go straight to the source: the text of the law itself. If that’s too time-consuming, rely on reputable organizations like ITAP (Institute on Taxation and Economic Policy) or the Tax Foundation. They’re far more reliable than outlets like CNN or social media.
To get a clear sense of where the economy is heading, I use a unique method I developed myself - one that’s proven to be more accurate than the predictions of Harvard economists: Industrial Waste Analysis.
If you’re curious, here’s the article where I explain it in detail:
In over 20 years of investing, I haven’t found any logical strategy that delivers better or worse returns based on whether Republicans or Democrats are in office.
Over the past 70 years, trying to time investments around which party holds the presidency wouldn’t have come close to the results you’d achieve by simply staying invested throughout the entire period:
But there are exceptions - moments when a clear buy signal emerges.
That brings us to today’s topic.
The success of any business boils down to one simple principle: the balance between money flowing out and money flowing in. The goal is to own businesses that minimize outflows while maximizing inflows.
One of the largest and most consistent outflows for any business are corporate taxes.
In 2018, a major buy signal appeared, but Wall Street’s herd mentality missed the bigger picture. The Tax Cuts and Jobs Act (TCJA), signed into law by President Donald Trump on January 1, 2018, was a game-changer for corporate America.
The TCJA reduced the federal top corporate income tax rate from 35% to 21%. It also expanded tax breaks for capital investments and introduced additional measures to reduce U.S. tax liabilities.
This was a bullish signal for the market as a whole, and the math was straightforward:
When companies pay less in taxes, they retain more cash. This extra capital can be reinvested into dividends, stock buybacks, research and development, acquisitions, and other growth-driving initiatives.
The graphic below highlights the impact on stock buybacks in the first year of the law’s implementation.
Most importantly, the 2017 tax law also expanded tax breaks for corporate expenses characterized as capital investment and expanded other ways to minimize U.S. tax liability.
(Clarification: The federal statutory corporate tax rate is currently set at 21.0 percent - reduced from 35.0 percent by the 2017 Tax Cuts and Jobs Act (TCJA). However, the U.S. tax code has many preferences that affect the rate actually paid by corporations, so the effective tax rate can be lower)
Many of the nation’s best known and most profitable corporations enjoyed the largest tax reductions:
And they continue to do so.
I don’t expect corporate taxes to rise, as reversing one of President Trump’s key policies from his previous term seems unlikely. This means rising corporate taxes should remain a small concern for investors.
On the other hand, further reductions - such as lower taxes on domestic production - could provide another boost for the stock market.
The problem: Tariffs
Tariffs, however, pose a bigger challenge and can create two outcomes that every investor wants to avoid:
Higher Inflation
Economic Retaliation from Other Countries
Why Inflation is a Bigger Threat Than Interest Rates
Inflation is the real danger for investors - not interest rates, despite what market pundits often claim. Inflation drives up costs not only for consumers but also for producers. If a company suddenly needs to spend more money to produce the same amount of goods, its profits take a hit. Tariffs increase production costs, making inflation a very real concern.
The Risk of Economic Retaliation
An all-out trade war could lead to retaliation from other countries. Think of it like two gangs showing up armed to the teeth for a final showdown. But when both sides realize they have too much to lose, common sense takes over and they usually find a compromise. While some back-and-forth retaliation might occur, I see a full-blown economic war as highly unlikely.
How to play this market
I’m a firm believer in acting proactively, not reacting after it’s too late. Instead of scrambling to “adjust” your portfolio when trouble arises, build it right from the start by following these timeless principles:
1. Invest in Companies with Strong Moats
Companies with a strong moat can raise prices more easily, even in tough situations like tariffs, because their customers rely on their products. This pricing power protects them from external pressures.
2. Look for High and Consistent Margins
Businesses with high, stable margins have more cushion to weather economic challenges. They can manage rising costs or other headwinds far better than companies with razor-thin margins.
3. Avoid Overreliance on a Single Factor
Industries overly dependent on one factor are highly vulnerable to sudden changes. For example, a homebuilder relying solely on Canadian wood would face three bad options if import taxes suddenly rose by 25%:
Absorb the higher costs, which hurts profits.
Pass the costs onto customers, potentially losing orders.
Source wood elsewhere at a higher price, disrupting long-term supplier relationships.
Each of these scenarios negatively impacts both revenue and profit margins - all from a single policy change.
By contrast, a diversified retailer like Home Depot HD 0.00%↑ has a much broader range of products and services. It can better manage rising costs in one category, such as wood, without significantly hurting its overall business.
4. Favor Companies with Diverse Supply Chains
Invest in businesses that don’t rely heavily on imports from a single country. Manufacturers that source raw materials primarily from the U.S. or multiple countries are far less affected by tariff hikes. For instance, if tariffs on Chinese goods increase, a company with suppliers across 12 other countries can adapt much more easily than one locked into a single supply chain.
By following these principles, you can build a resilient portfolio that thrives in a wide range of economic conditions.
Premium Content 📈
As the dust will settle on policy shifts, we will see that not all stocks are created equal. For smart investors, this is a chance to separate the winners from the laggards.
While others react when it’s too late, you can act with confidence and profit from current environment.
My premium reports uncover the stocks designed not just to weather a storm but to prosper in the eye of it.
The first mover advantage starts now.
Here’s what you get:
The first report covers a company that was already one of the big winners on the day of the election, signaling the markets faith in its future.
Why? Because it’s a company with an impenetrable moat. Their product is required by law for businesses to use unless they’re willing to face hefty penalties. Combine this with sky-high switching costs and free cash flow generation like clockwork, and you have a powerhouse positioned to capitalize on pro-business policies.
Get the report below:
The second report covers a domestic food producer insulated from tariff wars. While competitors grapple with rising costs from imported ingredients, this company’s raw materials come straight from American soil.
On top of that their new management team has already decades of experience in growing food brands and is applying this knowledge to do the same again with a new brand. Sales have already doubled in the last 4 years and still there are dozens of U.S. retailers that still don’t have their products in their shelves.
Get the report below:
The third report is getting prepared. Stay tuned!
Final thoughts
The next months are going to be interesting and I encourage investors to not gamble on specific policies but instead wait until an actual law was passed.
At the end of the day you don’t need to do much different than with a democrat in the White House because timeless investing rules are timeless for a reason.
Most changes in laws are of secondary importance and the most important ones for stocks investors are laws that directly impact the money in and outflows of a business, those are the ones to keep an eye on.
As the main danger for the stock market I see is Trump’s plan to use import tariffs to pay for tax cuts. Tariffs are a problematic way to raise money because they disrupt trade, make goods more expensive for consumers, and can lead to other countries imposing their own tariffs in response. This can hurt businesses and the broader economy.
Time will tell and we will know more in the coming months.
Until the next issue. 👋
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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.
(Social media thumbnail by Dall-E)
Nice article! Some useful insights you got there.