{"id":178973,"date":"2024-11-13T14:24:01","date_gmt":"2024-11-13T21:24:01","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=178973"},"modified":"2024-11-13T14:24:34","modified_gmt":"2024-11-13T21:24:34","slug":"financial-risks-under-a-trump-second-term","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/financial-risks-under-a-trump-second-term","title":{"rendered":"Opinion: There Could Be Financial Risks Under a Trump Presidency\u2014Here’s How to Hedge Against Them"},"content":{"rendered":"\n

With the presidential election <\/span>now<\/span> in the rearview mirror, it\u2019s time to plan and execute your financial strategy, given the new policies likely under a second Trump administration.<\/span><\/p>\n\n\n\n

Let me be <\/span>clear<\/span> from the start: I\u2019m not here to either demonize or lionize Trump or his policies. It doesn\u2019t matter whether you love or hate the guy. What matters is how you adapt because, inevitably, changing rules means new risks and opportunities. <\/span><\/p>\n\n\n\n

While <\/span>there are absolutely opportunities that<\/span> will arise from a second Trump presidency, today I\u2019m focusing on financial risks\u2014and a few ways to hedge against them.<\/span> <\/span><\/p>\n\n\n\n

Inflation and Overheating the Economy<\/span><\/h2>\n\n\n\n

Trump has proposed a 60% tariff on all imports from China and a blanket 10% to 20% tariff on imports from all other countries. <\/span><\/p>\n\n\n\n

Think retailers will <\/span>just<\/span> roll over and say, \u201cOK, sure, we\u2019ll just eat those extra costs\u201d?<\/span> Of course not\u2014they\u2019ll pass them along to consumers <\/span>in the form of<\/span> higher prices. <\/span><\/p>\n\n\n\n

Read:<\/span> inflation. <\/span><\/p>\n\n\n\n

Nor are tariffs the only inflationary policy Trump has proposed on the campaign trail. Reduced regulation and tax cuts <\/span>both<\/span> stimulate the economy, which it sometimes needs, but overstimulating the economy also leads to rampant inflation. <\/span><\/p>\n\n\n\n

In fact,<\/span> too much economic stimulus caused the recent inflation nightmare in the first place. The economy has suffered from high inflation over the last few years, not from a weak job market or low corporate profits. <\/span><\/p>\n\n\n\n

Beyond these policy proposals, Trump has never shied away from trying to pressure the Federal Reserve. Expect him to push J. Powell and company to lower interest rates once he takes office. Or \u201c#EndTheFed\u201d entirely, as some Trump allies in Congress and Elon Musk have <\/span>started advocating for<\/span><\/a>.  <\/span><\/p>\n\n\n\n

Lest you accuse me of getting my news from left-slanted media outlets, a study by <\/span>the <\/span><\/a>Wall Street Journal<\/span><\/a><\/em> came to the same conclusions. <\/span>Another <\/span>study by the<\/span> nonpartisan <\/span>Peterson Institute for International Economics<\/span><\/a> calculated that Trump\u2019s combined policy proposals would lift inflation from a baseline rate of 1.9% in 2026 to between 6% <\/span>to<\/span> 9.3%.<\/span> The group also found that the proposed tariffs <\/span>alone<\/span> would raise costs by $2,600 annually for the median U.S. household. <\/span><\/p>\n\n\n\n

Sustained High Interest Rates<\/span><\/h2>\n\n\n\n

As a real estate investor, what scares me the most about inflation is <\/span>actually<\/span> the cure: higher interest rates. <\/span><\/p>\n\n\n\n

When the Fed sent interest rates skyrocketing in 2022 and 2023, it <\/span>devastated commercial real estate markets<\/span><\/a>. Many investments <\/span>imploded,<\/span> as floating interest loan payments went through the roof and cash flows turned negative.<\/span><\/p>\n\n\n\n

Investors have breathed <\/span>a little<\/span> easier over the last few months, assuming that interest rates will drop significantly between now and the end of 2025.<\/span> In their September meeting, the average Fed board member saw <\/span>benchmark rates dropping to 2.9% in 2026<\/span><\/a>.<\/span><\/p>\n\n\n\n

And while the Fed foresaw cutting rates to 3.25-3.5% by the end of 2025, <\/span>MarketWatch reports<\/span><\/a> that derivative traders are now pricing in rates of 3.75-4%. <\/span><\/p>\n\n\n\n

Bond <\/span>traders have also sent bond yields<\/span><\/a> higher on mortgage loans since the election. That, in turn, sent mortgage rates to their highest level since July. <\/span><\/p>\n\n\n\n

Why do traders foresee slower rate cuts? Because of those inflationary Trump policies outlined. <\/span><\/p>\n\n\n\n

Higher interest rates mean higher cap rates, which is <\/span>great<\/span> for <\/span>buyers,<\/span> but bad for owners. Alongside our Co-Investing Club at SparkRental, I invest <\/span>every month<\/span> in a new group real estate investment. <\/span>I practice <\/span>dollar-cost averaging<\/span><\/a> with my real estate investments<\/span>, specifically<\/span> to protect against unpredictable gyrations in pricing.<\/span> <\/span><\/p>\n\n\n\n

Ballooning Government Debt<\/span><\/h2>\n\n\n\n

In his first presidency, Donald Trump spent more money than any previous president <\/span>in history<\/span>. <\/span><\/p>\n\n\n\n

No, really\u2014<\/span>during his administration,<\/span> $7.8 trillion was added to the national debt<\/span><\/a>.<\/span> And his second presidency is forecast to add a similar <\/span>$7.75 trillion<\/span><\/a> over the next decade. <\/span><\/p>\n\n\n\n

The <\/span>Congressional Budget Office<\/span><\/a> forecasts the national debt to rise from 97.3% of GDP in 2023 to 122.4% <\/span>of GDP<\/span> by 2034. And that forecast dates back to June\u2014it doesn\u2019t <\/span>take into account<\/span> the high spending plans of the second Trump administration. <\/span><\/p>\n\n\n\n

Ballooning debt adds to our inflation risk over time. What do countries do when their debts become too high? They devalue their currency to inflate the real value away. <\/span><\/p>\n\n\n\n

Oh, and high interest rates become infeasible when debts get too high. <\/span>So central banks have to keep interest rates low<\/span>, just<\/span> so the government can afford to make its debt payments.<\/span> Inflation gets to run rampant to pay for past decades of overspending. <\/span><\/p>\n\n\n\n

Geopolitical Risks<\/span><\/h2>\n\n\n\n

I\u2019m not saying a trade war with China will happen. But the further Trump gets from orthodox international relations, the less predictable it becomes. <\/span><\/p>\n\n\n\n

People of all political stripes loved to rant about globalization in the \u201890s and \u201800s. But here\u2019s the thing about globalization: Intertwined supply chains kept rival countries playing nice with each other. No one wants to go to war with a country with which they share billions of dollars of supply chains. <\/span><\/p>\n\n\n\n

Take away those trade ties, and what do you have? Unbridled rivalry and animosity. <\/span><\/p>\n\n\n\n

Businesses crave predictability. It allows them to expand and hire new workers\u2014which grows the economy. Unpredictable policies and international relations leave companies hesitant to invest. <\/span><\/p>\n\n\n\n

How to Hedge Against These Risks<\/span><\/h2>\n\n\n\n

Again, the second Trump presidency comes with <\/span>both<\/span> opportunities and risks, just like any change in <\/span>the way<\/span> the wind blows.<\/span> Here are some ways investors can come out ahead.<\/span><\/p>\n\n\n\n

Consistent monthly real estate investments<\/span><\/h3>\n\n\n\n

Broadly speaking,<\/span> real estate investments make a great <\/span>hedge against inflation<\/span><\/a>. <\/span>People need housing<\/span>, <\/span>and <\/span>they\u2019ll<\/span> pay the going rate, regardless of how much inflation devalues the currency.<\/span> Industrial businesses need industrial real estate, and so on. <\/span><\/p>\n\n\n\n

The main caveat there is interest rate risk. If inflation heats up again, the Fed will raise rates or, at the very least, stop lowering them. That will leave some struggling investors unable to refinance or sell\u2014even as their short-term loans come due. It will also keep cap rates higher than they would have been otherwise. <\/span><\/p>\n\n\n\n

That won\u2019t hurt new investments, however. I\u2019ll keep doing what I\u2019ve been doing: investing <\/span>every month<\/span> in new <\/span>passive real estate investments<\/span><\/a>. In our Co-Investing Club, we invest in <\/span>a mix of<\/span> private partnerships<\/span><\/a>, syndications, private notes, and equity funds. The opportunities keep coming. <\/span><\/p>\n\n\n\n

In particular, cash-flowing real estate investments with fixed-interest long-term debt will help protect against inflation <\/span>risk and interest rate risk<\/span>.<\/span> Watch out for investments that hinge on cap rates compressing again. <\/span><\/p>\n\n\n\n

We focus on risk first and foremost, even as we target <\/span>asymmetric returns<\/span><\/a>. <\/span>I feel great about <\/span>both<\/span> our investment strategy and <\/span>our<\/span> past investments, no matter what policy changes come down the pike.<\/span><\/p>\n\n\n\n

Oh, and<\/span> the near-certain renewal of 100% bonus depreciation won\u2019t hurt either. <\/span><\/p>\n\n\n\n

Certain types of stocks<\/span><\/h3>\n\n\n\n

Some <\/span>types of<\/span> companies stand to do better than others under Trump\u2019s proposed policies.<\/span><\/p>\n\n\n\n

American manufacturers who primarily serve American consumers should do well. <\/span>Companies that <\/span>either<\/span> import or export a large percentage of their products may <\/span>struggle between<\/span> U.S. <\/span>tariffs<\/span> and retaliatory tariffs abroad.<\/span> <\/span><\/p>\n\n\n\n

India, Indonesia, Vietnam, Taiwan, and the Philippines may benefit from companies moving their supply chains out of China. <\/span><\/p>\n\n\n\n

Fossil fuel-heavy stocks such as energy companies may do well. Green energy companies? Not so much. <\/span><\/p>\n\n\n\n

Finally, <\/span>bear in mind<\/span> that stocks have historically been a solid hedge against inflation. <\/span>A lower corporate tax rate will only boost profits and stock prices<\/span>, at least<\/span> in the short term.<\/span> <\/span><\/p>\n\n\n\n

Precious metals<\/span><\/h3>\n\n\n\n

Gold and other precious metals serve as a hedge against both inflation and geopolitical risk. <\/span><\/p>\n\n\n\n

If you worry about <\/span>either of<\/span> those risks under a second Trump presidency, you can always seek shelter in \u201cthe yellow metal.\u201d<\/span><\/p>\n\n\n\n

Cryptocurrencies<\/span><\/h3>\n\n\n\n

Trump\u2019s bet on the crypto industry seems to have paid off: The industry donated over <\/span>$170 million to super PACs<\/span><\/a> funding crypto-friendly politicians, including Trump. Nearly all the candidates those super PACs backed have won, creating a wave of incoming politicians who have promised crypto-friendly regulation. <\/span><\/p>\n\n\n\n

That set the stage for a surge in cryptocurrency values, which <\/span>we\u2019re already seeing<\/span>. Bitcoin crossed the $80,000 mark for the first time <\/span>ever<\/span> in the days following Trump\u2019s victory. <\/span><\/p>\n\n\n\n

Don\u2019t Stop Investing<\/span><\/h2>\n\n\n\n

I have friends across the political spectrum, and I\u2019ve seen everything from irrational exuberance on the right to panic on the left. Neither will serve your financial goals. <\/span><\/p>\n\n\n\n

Whatever you do, don\u2019t panic and pull all of your money out of investments. Keep investing small amounts, month in and month out. Stock and real estate markets will gyrate like they always have, and your mission is to keep a level head. <\/span><\/p>\n\n\n\n

I invest $5,000 <\/span>every month<\/span> in a new real estate investment as a member of SparkRental\u2019s Co-Investing Club. I also invest money automatically every week in broad stock ETFs. <\/span><\/p>\n\n\n\n

The market goes up, the market goes down. Politicians come, politicians go. I keep investing\u2014and I come out ahead because I try not to get too greedy or too fearful <\/span>no<\/span> matter the <\/span>news of the day<\/span>.<\/span><\/p>\n\n\n\n \n

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With the presidential election now in the rearview mirror, it\u2019s time to plan and execute your financial strategy, given the new policies likely under a second Trump administration. Let me […]<\/p>\n","protected":false},"author":158586,"featured_media":178968,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[4433],"tags":[],"class_list":["post-178973","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/178973","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=178973"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/178973\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/178968"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=178973"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=178973"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=178973"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}