Are You a Metathesiophobe?

Are You a Metathesiophobe?

Ancient Greek philosopher Heraclitus is credited with saying, "the only constant in life is change". In the last four years we've faced Covid, crypto, China, inflation, wars, artificial intelligence, housing shortages, rising interest rates, and two presidential elections. That's a lot of change. Being able to adapt to changes like these is crucial in life, particularly for investors. As Ben Franklin said, "when you are finished changing, you are finished". Metathesiophobia is an extreme fear of change. We've probably all leaned that way at times, but the key to avoiding this phobia is remaining flexible. So let me address some of the changes we might soon face, and how a flexible investor might navigate their economic impact.Setting aside political preferences, Trump's stated agenda of mass deportations could cause a major shift in the work force. There are logistical, legislative, and legal hurdles to implementing that plan, which could lessen its impact. Assuming those hurdles are cleared, we could be facing the removal of around 11 million people, about  3% of the population. Actual results will also depend on how much money gets thrown at the problem.

The potential economic benefits are savings on government support services and the shifting of labor to legal workers. This will be offset to some extent by select companies experiencing potential labor shortages due to a shrinking labor pool, and an increase in payroll costs as cheaper labor dries up. Flexible investors might avoid industries such as construction, agriculture, and hospitality that could experience the most labor-related impact.

Setting aside political preferences, a major reduction in corporate income taxes could be coming. Trump's stated agenda is to reduce corporate taxes from 21% to 15%. Corporate taxes only account for about 7% of tax receipts, compared to about 67% from individual income and payroll taxes. Based on these assumptions, this policy would reduce tax receipts by about 2%. To offset this, taxes on individuals would need to go up about 3%. Remember Congress has the final word on any tax plans, so stay tuned.

The key takeaway here is the negative impact on individual taxpayers might be minimal, but the positive impact on corporate taxpayers might be significant. Flexible investors might look to industries with high current tax rates that could benefit the most from any tax reduction. Those tend to be in unglamorous and often ignored industrial sectors such as oil, metals, mining, and chemicals. 

Setting aside political preferences, we could be facing an upward shift in the cost of goods. The majority of economists think Trump's agenda of sweeping tariffs would result in rising prices and a drag on the economy. On the other hand, some believe we saw little economic impact from tariffs during Trump's first term. The magnitude of economic impacts from tariffs is hard to project, but bigger tariffs will create bigger impacts. Investors need to wait and see the magnitude of new tariffs. Remember, flexibility always trumps metathesiophobia.

The opinions in this material are for general information only and not intended to provide specific advice or recommendations for any individual. The economics and market forecasts set forth in this material may or may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing includes risk, including fluctuating prices and loss of principal.