A Note on the Election
Following nearly two years of fraught anticipation and one of the more tumultuous presidential campaigns in recent history, the 2024 US election cycle has come to a historic conclusion. Donald Trump’s return to the Presidency, the new Republican majority in the Senate, and remaining uncertainty over the composition of the House of Representatives all disrupt the status quo of the last four years. While emotions continue to run high, we believe a balanced, objective, and informed perspective remains the best course of action to successfully navigating this new political regime, which could have far-reaching implications for the economy and markets. That said, while Republican policies may face fewer hurdles in the legislative pipeline going forward, some of the more “drastic” measures proposed by the new administration on the campaign trail may not necessarily come to bear.
For one, President Trump was frequently guided by market movements—particularly within equities—throughout his first four years and investor sentiment is by-and-large expected to remain at the forefront of fiscal policy decisions the second time around. At a very high level, the continuation of stimulative fiscal policy in the form of low (and possibly lower) tax rates, deregulation, and a generally business-friendly environment are bullish for the stock market, while more nuanced foreign and domestic policies related to tariffs, immigration, and deficits could have a mixed impact on the underlying economy. Such a dichotomy has already been evidenced by divergent movements in stocks and bonds immediately following the election results. Stocks rose sharply on November 6th in anticipation of loosening fiscal conditions and the potential for future market performance to be used as a bellwether for legislation, while Treasury yields spiked (mirroring a drop in bond prices) as fixed income investors questioned the future path of deficit spending and inflation, both of which may rise should many of President Trump’s campaign proposals become reality
Without purporting to have a crystal ball, below are a few thoughts on some of the more likely policies and campaign promises the Trump administration could follow through with, along with their possible impact on the economy and markets.
On taxation, an extension or renewal of provisions from the 2018 Tax Cuts and Jobs Act (TCJA) appears likely, though more specific guidelines on estate taxes and “sunset” clauses in many aspects of the original bill remain uncertain and are set to expire next year. A reduction in corporate tax rates can also be expected in some form. However, while the administration seems inclined toward fiscal expansion, concerns over rising national debt persist, particularly when evaluated as a proportion of Gross Domestic Product (GDP). Continued deficit spending in support of stimulative fiscal policy may put upward pressure on Treasury yields (and downward pressure on bond prices) as the US’s debt service burden grows. Tax cuts, especially on an individual consumer level, may also spark an uptick in inflation, as could tariffs, another pillar of President Trump’s proposed economic policy.
At their core, tariffs have historically been used as tactical levers to influence trade, and their effectiveness as longer-term sources of income (and possible substitution or replacement for traditional tax schemes) in the modern US economy is unclear. In addition to being inflationary, tariffs can also prompt retaliatory measures by other countries that may constrain global trade and disrupt supply chains. While many tariffs enacted during President Trump’s first term remain in place, further expansion may be limited by consumers’ tolerance of higher prices.
In the face of potentially reignited inflation, the Federal Reserve will have to carefully examine future monetary policy actions as well. While a 25-basis point (0.25%) cut to the headline Fed Funds Rate this week appears baked into market expectations, the future path of interest rates is less certain, as is the continued independence of the Federal Reserve to conduct monetary policy without political influence. A vocal critic of the Fed, President Trump is unlikely to reappoint current chairman, Jerome Powell (Trump’s own appointee from 2018), when his term expires in mid-2026 and could recalibrate the Fed’s objective mandates of promoting maximum employment and stable prices.
With regard to deregulation, sector-by-sector impacts under the Trump administration may vary widely, particularly in areas such as energy and technology. Traditional energy markets will likely experience and welcome some deemphasis on carbon emissions in favor of stronger domestic production and possible job creation, though global momentum in green energy and the financial landscape supporting it (which may be aided by broader fiscal stimulus) could drive continued progress in renewable fuel sources. Additionally, despite President Trump's pledges to pull back on renewables spending included in the Inflation Reduction Act, actually doing so could spark pushback from members of his own party whose constituents have benefitted a great deal from such investment. Technology companies may experience a more nuanced regulatory approach, with potential winners and losers emerging based on the administration’s stance toward individual companies. President Trump’s favorable views on cryptocurrency may drive growth there as well, with immediate price reactions seemingly anticipating more formal support from the incoming administration.
Similarly, the US dollar, which has been strengthening in recent weeks as markets began anticipating a potential Trump victory, shot even higher upon confirmation of his election, rising against a basket of other currencies. This move, despite President Trump's preference for a weaker exchange rate, was triggered by expectations of higher inflation and interest rates domestically. Conversely, currencies of countries that may be more negatively impacted by Trump's trade policies, such as China and Mexico, have weakened sharply. Gold, often viewed as a “hedge” against inflation, has also risen persistently higher over the past year but weakened in the immediate aftermath of the election.
Importantly, the economy is starting off this new era on relatively strong footing. GDP and labor markets remain robust, while inflation has fallen from peaks and continues to trend toward a more normal baseline. Further, while headlines are captivating and often quick to garner reactions, actual legislation and policy actions take time to evolve and typically do not have immediate impacts on the economy. Long-term investment strategies ultimately require investors to put emotions aside, with the validity of concerns weighed against the likelihood of probable outcomes. Historical analysis shows that markets can thrive under varied political regimes, yet recent momentum has driven narrower and more concentrated portfolio compositions, introducing additional risk. Remember that diversification is the “heavy keel” that keeps portfolios balanced and positioned to weather the short-term tips and turns of the market, while thoughtful allocation across asset classes, regions, and sectors, with a steady focus on income-generating assets and appropriately valued investments, should prevail.
