What Will a Trump Presidency Mean for U.S. Manufacturing Stocks?

By Markets Fool.com

During his campaign, President-elect Trump had a lot to say about the state of American manufacturing. He railed againstUnited Technologies(NYSE: UTX)subsidiary Carrier's decision to relocate an Indiana factory to Mexico. He went so far as to threaten to hit the company with 35 percent tariffs on any of its furnaces and air conditioners it imported from Mexico.

Continue Reading Below

But once he's actually in the White House, the impact on United Technologies and other major U.S. manufacturers likeGeneral Electric(NYSE: GE)andHoneywell International(NYSE: HON)is far from certain. Which should make investors skeptical.

Major U.S. manufacturers could be affected by President-elect Trump's plans. Image source: Getty Images.

Looking (and looking) for specifics

Unfortunately, President-elect Trump's website is light on specific plans about how he'd handle manufacturing issues like Carrier's relocation. "Manufacturing" isn't one of the broad categories of policies listed there, and there's nothing about it in the "Economy" section either.

But assuming President Trump were to somehow successfully prevent Carrier from moving its operations to Mexico -- and stop similar moves by other major manufacturers -- it would be bad for investors. Outsourcing operations to countries like Mexico where labor is cheaper is an easy way to make higher profits on the same goods, but there are other advantages to global companies having operations in Mexico.

Continue Reading Below

Mexico has more free-trade agreements than any other country (45 compared to the U.S.'s 20), which makes it cheaper to export goods from Mexico to its free-trade partners.Also, although much smaller in area than the U.S., Mexico is a global manufacturing powerhouse with numerous equipment manufacturers in close proximity to one another, giving manufacturers access to a wide pool of potential customers and suppliers.

Trump could unilaterally impose tariffs on a country like Mexico, or even China; the president has that authority. However, such moves could spark a trade war, with tariffs being slapped onto American goods in response, which would probably be a net negative for U.S. manufacturers, not to mention American consumers

That said, it's worth remembering that Trump's policies end at the U.S. border. So, for a U.S. manufacturer with global reach, there's a limit to the effect Trump's policies can have on its foreign operations. For example, GE is building a $200 million diesel locomotive manufacturing facility inIndia that will manufacture locomotives for Indian Railways. Because it's located within the same country as its customer, tariffs wouldn't apply.GE and other big U.S. manufacturers have a number of other tactics they can employ to get around unfavorable regulations: offshoring assets instead of paying a repatriation tax, for example, or moving a factory to Mexico and exporting goods from there. So even in the event of a trade war, it's hard to say exactly what the impact would be on a given company.

Sweetening the pot

It's possible, though, that President Trump would work with Congress to try to use a carrot -- rather than a stick -- to convince manufacturers to increase their operations in the U.S. These strategies could include tax credits for research or new investments, or possibly financing apprenticeships, a move popular in Europe.

Such moves could be advantageous for U.S. manufacturers and their investors. However, it would depend on how robust such incentives were. A tax credit, for example, would have to be large enough to offset the increased costs of manufacturing goods in the U.S. rather than overseas. If it wasn't a clear net positive, companies would probably just fail to take advantage of it. The same is true for other incentives.

And at the risk of sounding like a broken record, there's been no indication from Trump that he actually plans to employ any of these strategies.

If you build it

However, we can glean some small tidbits -- and I do mean small -- about Trump's plans from his section on "Infrastructure."

There, Trump proposes pursuing "an 'America's Infrastructure First' policy that supports investments in transportation, clean water, a modern and reliable electricity grid, telecommunications, security infrastructure, and other pressing domestic infrastructure needs."In a subsequent statement, Trump also listed mass transit and high-speed rail as among his infrastructure priorities.

Increased infrastructure spending in these categories would be a boon to many U.S. manufacturers like General Electric, which manufactures turbines for power plants and railroad engines. Honeywell, with its security and energy management systems, could also benefit.

For its part, the market seems to think that construction will benefit from a Trump presidency. Shares ofCaterpillar(NYSE: CAT)and several steel stocks jumped after his win.Despite a statement by Senate Majority Leader Mitch McConnell that infrastructure would not be a high priority, an infrastructure spending bill is generally seen as having bipartisan support.

With no concrete plan on the table, it's tough to know exactly which companies will benefit, and to what extent. The only detail about the amount of spending proposed is that it would probably be at least $500 billion -- derived from a Trump promise to "more than double" the $250 billion proposed by rival Hillary Clinton.That's simply too vague to base any investment decisions upon.

Investor takeaway

By and large, Trump's plans as they've been expressed to date aren't concrete enough to say definitively what kind of impact they'll have on U.S. manufacturers. And even when specifics are announced, it's unclear what kind of reception his proposals will receive in a narrowly divided Senate and House.

While it looks as though increased infrastructure spending is the likeliest of these proposals to come to fruition, McConnell's statement that it would not be the highest priority casts some doubt on that as well. The bottom line is: It would be unwise to make a decision about any manufacturing stock based solely on the outcome of the election.

10 stocks we like better than United Technologies
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and United Technologies wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

John Bromels has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.