How Much Will ‘Making America Great Again’ Cost Consumers?

Make sure you read all of this month’s special feature coverage leading up to President Trump’s First 100 Days here.

Earlier in this feature series, we dug into what industries can anticipate a better regulatory environment from the incoming Trump administration. However, it would be a mistake to assume that a pro-business president is going to mean nothing but smooth sailing for corporate America. While the Energy and Financials sectors appear to have an ally forthcoming in the White House, other industries face a great deal of uncertainty, making it difficult to understand what to expect from the next four years.

Granted, there aren’t any industries that have been the direct targets of Trump’s rhetoric to this point. Where the Obama administration made it pretty clear where it stood in its stance towards the fossil fuel-based industries, for instance, Trump has worked in broad strokes. That said, many of his biggest policy proposals would have the ultimate effect of generating tremendous chaos. Even if repealing Obamacare and slapping massive tariffs on imports does prove successful in juicing the American economy and reducing the trade deficit in the long run, the short-term effect of the policies is going to be a lot of unpredictability.

Massive changes in policy create a state of flux that’s difficult to anticipate and can hurt businesses, and the massive changes Trump has been, well, trumpeting will mean a lot of upheaval in some of the largest economic sectors in the country.

Uncertainty in a Post-Obamacare Future…

For the sake of brevity, let’s not dig into how well (or not) the Affordable Care Act has worked to this point. It’s clearly on shaky ground this year, with some pretty massive hikes to premiums, but any assessment of the bill at this point would A) be premature and B) need to be in the context of just how dysfunctional the healthcare industry was prior to its existence. The industry is really still just settling into this new reality, and it’s entirely possible that another five years and a few tweaks to the bill could smooth off the rough edges. At this point, though, it’s looking like we may never know. Republicans are pretty much locked into making a big public show of killing the law, and even if they can finagle some sort of partial repeal, the elements they’ve expressed the most discontent with – the exchanges and individual mandate – are almost certainly gone, even if they can salvage other sections.

Unfortunately for the healthcare industry, unraveling Obamacare is not going to be an easy feat. What’s more, it’s going to whipsaw an industry that’s already spent the last eight years dealing with an enormous amount of change. The Affordable Care Act was a massive shift that took a lot of work to adjust to and spent years in its rollout. Now, just as they’re getting close to the finish line, the whole circus has got to pack up and head right back to where it started.

So what, exactly, is that going to mean? It’s almost impossible to say, especially when there hasn’t been any sort of indication at this point what Republicans have planned to be put in its place. They’re currently trapped between a raging army of their constituents who are going to be marching on Washington if they don’t give them the repeal they’ve been clamoring for, and the raging army that will march on Washington should they toss 30 million people off their insurance plans and bring back annual limits and preexisting conditions rules.

While Republicans are probably not interested in letting lapse the portions of the bill that made everyone’s insurance function better (even if it also made it more expensive), the parts they do want to get rid of were necessary compromises to make the universally popular parts work. Without the individual mandates pushing young, healthy people to get insurance, selling plans without being able to weed out the sickest people is going to become cost prohibitive. The “death spiral” people have feared in the exchanges could just as easily play out in the entire individual market, with insurers needing to charge exorbitant premiums to keep from losing money only without anyone being able to access subsidies. The end result might be even more people trying to get by without insurance than there were before Obamacare, which will in turn hit hospitals hard as they return to having to provide care to a population without insurance.

Of course, regardless of what they do, the transition isn’t likely to be a smooth one. A full repeal is going to rock the system and prove extremely unpopular. A partial repeal is likely to ruffle the fewest feathers in the short term, but would have serious sustainability issues in the long run.

Hospitals Feeling Ill, Pharma Gets a Dopamine Boost

So how does this break down on an industry-by-industry basis? The good news for healthcare investors is that it’s not all bad. Firstly, it’s worth noting that the individual market is actually a relatively small portion of the insurance market as a whole. Non-group plans account for about 7.00% of the population as a whole (compared with the 49% of Americans who get their insurance through their employer), with over 70% of full-time workers getting insurance through their employer, so the bulk of the industry is in the large- and small-group plans offered through employers, which is a higher-margin business than individual plans. That should mean that, while there’s going to be a tremendous amount of upheaval in the non-group segment, the industry as a whole may not be subjected to so drastic a shift.

Still, that’s likely to mean that insurers are going to take a hit in terms of earnings. What’s more, if companies are forced to continue offering individual plans they can’t afford due to a partial repeal, the entire segment could be in jeopardy. Because of this, exposure to Obamacare repeal risks will likely vary significantly on a company by company basis, forcing interested investors to do some research on which insurers rely on the individual market for the biggest portion of their revenue. That could get tricky, as the industry starts to fragment significantly into a number of regional players once you start digging into who’s most active in which markets.

Some of the big five insurers like UnitedHealth (UNH), Humana (HUM), and Aetna (AET) already had plans to eliminate or severely restrict their participation in the exchanges, which might make one assume that these companies won’t be affected much by a repeal. But, again, depending on how much of the law gets eliminated, and on what new plan follows from a Republican Congress, the individual markets as a whole could be seriously roiled, potentially affecting a wide spectrum of insurers even beyond participation in Obamacare.

The real loser, though, may be hospital stocks. While losing ground in the individual market may hurt insurers, the bulk of their business should remain relatively unaffected. Hospitals, however, are going to have to continue providing care to the people who have lost their insurance without getting compensated, the exact untenable situation Obamacare was supposed to remedy. Hospital stocks like HCA Holdings (HCA), Community Health Systems (CYH), and Tenet Healthcare Corp. (THC) plunged after Trump’s election. Most have regained some ground since then, with HCA currently trading above its pre-election price, but Community has lost over a third of its market cap from three months ago and Tenet is off almost 14% over the same period.

That said, the entire sector isn’t facing the same difficult outlook. Pharmaceutical companies appear to be in a strong position under a Trump administration, with a potentially easier regulatory environment and streamlined FDA process. Granted, pharma was one of the biggest potential beneficiaries of the TPP, which had negotiated better protections for their intellectual property, but the markets clearly seem to think a friendlier environment at home will more than make up for any marginal losses overseas.

Would Trump Really Start a Trade War With China?

All this TPP talk is a solid segue into the second major area of potential disruption and chaos: trade. Globalization was the jobs-destroying demon Trump spent most of the campaign promising to exorcise, and if he actually carries through with everything he promised, it could have huge implications for the American economy.

At this point, it’s time for the obligatory observation that the anti-free trade stance of Donald Trump (and a number of other politicians of all ideological stripes) is rooted in some pretty flawed logic, and that the differences in purchasing power parity are larger than any tariffs the country has in place by orders of magnitude, but that’s pretty well-worn territory at this point.

However, whether or not Trump is onto something almost the entire economics establishment rejects, the effect on the American economy of a series of new protective tariffs could be pretty substantial. If they’re a series of modest tariffs, it might wind up being pretty marginal. However, if it’s the big honkin’ 45% tax on Chinese imports that Trump threatened on the campaign trail, it could wind up profoundly remaking the American (and global) economy.

A tariff that big would undoubtedly prompt a trade war with China that would mean big tariffs on American goods in China, something that could hurt a number of industries sending American-made goods to China, including airplane manufacturers, agricultural companies, pharmaceuticals, and even Apple (AAPL). The bigger issue, though, would be the potential for a massive increase in consumer prices here in America.

The flow of cheap goods into America has meant big things for retail, allowing companies like Wal-Mart (WMT) and Target (TGT) to cultivate a culture where American consumer count on paying very little for a wide variety of imported goods by driving down prices and maintaining paper-thin margins. That whole infrastructure is turned on its head if so significant a trade barrier is erected. Even in the unlikely event that domestic industries actually begin replacing foreign companies in areas like textiles or electronics, it would take years to get manufacturing operations up and running in the states, and it will mean a big increase in price.

Not to mention, even goods manufactured in the States could feel the sting. Trump’s Twitter jockeying with major auto manufacturers could highlight this. After taking credit for Ford’s (F) decision not to invest $1.6 billion in a new plant in Mexico and instead investing $700 million in expanding in production (a move that likely had a lot more to do with the growing demand for electric cars than Trump’s sabre rattling about “border taxes,” but who’s counting), Trump also lambasted General Motors (GM) for importing Chevy Cruzes from Mexico. However, the reality is that the auto industry already relies on a wide variety of global supply chains that are already incredibly interconnected. Even if Trump can shame companies into assembling cars in the United States, the reality is that most of the parts are likely to be imported, meaning big tariffs would boost the sticker price and hurt sales regardless of where they’re being put together.

Trump may enjoy focusing on these individual cases to try and illustrate a point (and dramatically oversell his involvement in the decisions), but the reailty is that the global economy is complex and interconnected in ways that his simple, broad strokes don’t account for. The consequences of a major policy change like he’s proposing would ripple through the economy in ways we can’t predict, affecting secondary and tertiary players that may not even realize the degree to which they’re currently linked to overseas players until costs start to spike.

Given that people working in manufacturing represent about 10% of the American workforce and these sorts of price increases are going to hit, well, everyone, the outlook for a consumer class empowered by an expansion of the manufacturing workforce absorbing these price hikes without hurting sales for a wide range of consumer goods seems pretty bleak. Retailers are likely looking at a Sophie’s choice between watching what’s left of their profit margins completely evaporate and raising prices to the point where it erodes their business. Maybe both. For that matter, almost any company in the consumer goods business is going to be facing a future where their customers have a lot less money to go around.

Of course, the question remains whether Trump actually pursues something so drastic or, even if he does, if he’ll actually be able to make it happen. There’s clearly a populist upwelling of support on the right and left for this sort of policy change, but there’s also a political class that seems to understand just how drastic the consequences of caving to popular pressure on this could be. Not to mention, support for free trade has long been a bastion of the Republican party, and the traditionalists within Trump’s own party will probably fight him on this. Of course, there’s not really a ton of love lost between them and Trump now, so that’s nothing new.

A Little Less Uncertainty Would Be Nice…

Macroeconomics are, by their nature, extremely murky. There’s no real way of knowing what sort of effect changes like repealing Obamacare or reversing decades of American trade policy might have. However, regardless of how either plan may play out in the long run, one certainty is that, until markets can begin to feel confident about the direction things may take, the chaos is going to continue to hurt the economy. Uprooting an orthodoxy, whether it’s smart or not, makes things tough while the system is going through upheaval.

What does that mean for markets? Well, investors should keep a close eye on Trump’s first 100 days to see just how much of Trump’s campaign trail bluster seems translatable into reality. Congress appears to be ready to damn the torpedoes and rush into an Obamacare repeal, something that Democrats are bound to fight, but may not be able to block. As for the tariffs, Trump’s been full of threats on Twitter (TWTR), but it’s still not clear if he’s just trying to shame companies into keeping jobs at home. If he’s really not bluffing and heads into a trade war with China, the end of Obamacare could coincide with a new trade regime. That’s a lot of chaos at the same time.

Even if healthcare comes out the other side relatively unscathed, insurers and hospitals may have trouble ginning up a lot of confidence from public markets while the future remains too uncertain. And as for trade policy, the effects there are so far-reaching that it’s hard to imagine which industries won’t be affected. Markets don’t currently seem to be showing that much volatility as of yet, and it may be several quarters before any large-scale shifts would start to show up in earnings reports.

Regardless, while the benefits to Energy and Financial sector companies may currently be pretty clear, there are plenty of reasons to remain cautious about the outlook for the American economy. There’s no certainty about how massive changes in policy might play out, but even if it’s better than expected, the short-term chaos could well create yuuuuuge problems.