With a new administration it is natural for investors to have some concern about how one’s investments might be impacted by changes in policy. Having a president with no previous experience in government certainly heightens the concern.
When considering the impact of government policy on investing, it is important for investors to differentiate what branches of government are having an effect. Generally there will be four levels of government to consider. Those being federal, state, county, and city.
Looking at housing for example, all branches of government can play a role. The federal government would impact interest rates and tax policy. All branches of government can have some impact on employment, which affects the demand for housing. In addition city and county regulations can impact the supply of housing being built.
On the federal level we can see some of the influence Trump is having on specific industries. At a recent news conference, he made critical comments about the drug industry, and stocks in that sector immediately sold off
It is important to realize that all companies are going to be impacted by government policy, but for some the impact is much more significant. With the federal government paying for a significant percentage of overall drug spending, it is quite obvious that any change in policy can have a material effect on these companies. In addition any change in the approval process by the FDA will significantly imp[act drug stocks.
Defense companies are another industry where the federal government plays a major role. One major contract can have a major impact on a company’s overall profitability.
Some industries are considered to be relatively immune from government policy. The tech industry is an example. While the government is certainly a customer of various tech products, the impact is not overly significant.
However, there are indirect changes in government policy that can still have a material impact on an industry such as tech. For example foreign operations tend to be quite significant, oftentimes more than 50% of revenue for many tech companies. A major change in trade policy can certainly have an impact on corporations with extensive foreign operations.
If the government has a major change in tax policy, some companies will benefit and others will be hurt. While the U.S. has essentially the highest stated corporate tax rate in the developed world, because of deductions many companies pay little in taxes. A reduction in rates with less writeoffs could cause some corporations to actually pay more in taxes.
It is difficult at times to determine if a comment a president makes is real significant, or is just bluster. It is unclear whether the recent comment Trump made about drug pricing will lead to any change in policy.
For investors who do have individual stock holdings it might be tempting to want to avoid companies being directly impacted by government policy. Obviously by investing in these companies,there is an added level of uncertainty. However, just because there is uncertainty does not necessarily imply that owning these companies will be bad investments. Also, avoiding certain industries results in a less diversified portfolio.
For most investors who just own diversified funds the impact of government policy on specific companies will not be that significant. What most investors should be concerned about involves government policy that impacts the overall market. Some areas to consider would be changes in employment, interest rates, taxes, and trade policy.
Certainly with a new administration and given the current makeup of Congress there will be some new pieces of legislation passed. Most likely the impact on the overall market will be mixed, though for some specific industries the effect would be more significant.
