Well, here we are again. We’ve survived another contentious presidential election and are on the eve of a Donald Trump administration. You would certainly be forgiven for feeling those 2016 vibes. I fully recognize this is a very emotional and polarizing topic and no matter your political leanings and affiliations you likely have very strong feelings. By no means do I intend to minimize your feelings or minimize the impacts of non-economic policies. But please understand that I am not qualified to speak on those issues as that is not my area of expertise. In this piece I intend to stay in my lane and focus on finance and the economy while leaving the rest for others to opine.
It is clear from exit polls and post-election focus groups that the economy was an important issue for many voters. The post-COVID economy has been fraught and unevenly felt across the United States. While the coasts are generally doing well the interior of our country, still reeling from the offshoring of good manufacturing jobs, began facing a new challenge. As many families already struggled to make ends meet, the monster that is inflation reared its ugly head, reducing the purchasing power of our dollars. Prices for everything skyrocketed. Prices for groceries, gas, clothing and automobiles among others rose considerably while high home prices and soaring interest rates put the dream of homeownership out of reach for many. It’s little wonder so many were feeling sour about the direction of our country.
Reasonable people can argue over who deserved the blame for out-of-control inflation. Personally, I would place 50% of the blame on the Federal Reserve Bank and split the remaining 50% between the policies of Trump and Biden. While there is enough blame to go around, the reality is that the worst of it occurred under Biden’s watch so rightly or wrongly, many voters held him and by extension Kamala Harris responsible. While the rate of inflation is slowing, it is very important to realize that this doesn’t mean prices are coming down. In fact, they are still rising, just at a slower rate than they were in 2022.
Trump will have the benefit of his party holding slim majorities in both houses of Congress giving Republicans significant control over the legislative agenda. So, what may we expect and how may it affect your investments?
First, I fully expect an extension of 2017’s Tax Cuts and Jobs Act (TCJA). Under present law TCJA was set to expire at the end of 2025 which would have increased tax rates for just about everyone. An extension means US households will avoid higher tax rates. This is generally good for economic growth. Trump has also talked about further reducing corporate taxes from 21% down to 15%. According to the Congressional Budget Office (CBO) these proposals would increase the deficit by $7.5tn over the next decade. Revenue forecasting is an imprecise science. CBO estimates do not take into consideration the possibility of increased economic activity related to the tax cuts nor can they account for the many unforeseen events that may shape the fiscal outcome. That being said, actual government revenue has exceeded the CBO’s 2017 pre-TCJA estimates. While extending TCJA is a sure thing in my opinion, a further reduction of corporate rates may be a tougher sell even in a Republican congress due to ballooning deficits.
Trade and tariffs are long a cornerstone of Trump’s economic policy. To the Economic Club of Chicago, Trump expressed his enthusiasm for tariffs calling it “the most beautiful word in the dictionary”. While it is yet to be seen what is policy and what is a threat intended to bring our trading partners to the negotiating table, tariffs are by their very nature inflationary. Contrary to the President-elect, tariffs are paid by US importers, not foreign exporters. When an item crosses the US border into control of the US Customs and Border Protection (CBP), the payment is typically made to the US Treasury as part of the customs clearance process. Unsurprisingly, this process is highly complicated, and many importers use the services of Customs brokers to calculate the tariffs, further adding to the costs of importing goods. Trump has said he would enact 60% tariffs on all Chinese imports and 10% tariffs on imports from everywhere else. More recently, Trump has threatened 25% tariffs on Mexico and Canada unless they stem the flow of migrants and narcotics through their borders with the United States. A President has significant authority to act unilaterally with regards to tariffs, so Trump can likely impose some of these without Congressional interference. Enforcing 25% tariffs on Mexico and Canada may be more difficult as it appears to conflict with the United States -Mexico-Canada Agreement signed by none other than Trump in 2018. Trade negotiations could yield a range of outcomes but the potential for retaliatory tariffs is high. In response to the US restricting exports of technology, China has already moved to halt exports of critical rare earth elements needed for the manufacturing of advanced microchips. All of this to say we will need to wait and see what happens but be watchful for inflation to reverse its downward trend.
President-elect Trump has talked at length about broad deregulation. Efforts to streamline business and reduce regulatory compliance costs can have a positive impact on all businesses but especially small business where the costs of compliance can be prohibitive. Additionally, less enforcement of anti-trust laws may boost mergers and acquisitions further assisting smaller businesses as they are acquired.
Greater immigration enforcement, tighter borders and deportations have also been staple promises made at Trump’s rallies. The challenge facing the President will be that our economy relies on immigrant labor. The US population is not growing sufficiently to support our growing economy, so immigration is necessary. With the Republicans holding both houses of Congress legal immigration reform is a possibility. Logistical challenges and costs could limit any large-scale deportation efforts. If enacted as articulated, these policies risk tightening an already tight labor market pushing up labor costs. This too could lead to higher inflation.
Our Investment Policy Committee met last week to discuss all these issues in an attempt to understand how they may affect our investment strategies. In this meeting we consulted with two external experts to get outside opinions as well. In the end, we opted not to make any changes and to take a wait and see approach. So far, markets have responded well with the S&P 500 up about 6% since the election. In our analysis, we are expecting interest rates to remain elevated due to the possibility of larger deficits and fewer interest rate cuts from the Federal Reserve. We expect economic activity to remain robust and add to already strong fundamentals for US equities. Our recent increase of small US companies looks like a particularly good decision in light of expectations. The Russell 2000, an index which tracks the performance of small US companies is up 8.8% since the election. While we are generally optimistic about the prospects for US equities coming into the new year, we will have to be diligent about watching policies and be ready to reposition assets if signs of elevated inflation return.
President-elect Trump would be wise to heed the lessons of this election. Voters are not likely to hold him and the Republican party in high regard if prices remain high or even worse, rise further. As several of his policies can be inflationary, he may be forced to adjust course lest he and his party face the wrath of disenfranchised voters come 2026.
Please be on the lookout for our annual economic outlook piece coming out in January and our economic outlook webinar.
As always, please reach out to your advisor or any member of our team if you would like to discuss this further. As we have just finished the Thanksgiving holiday, we at EBW are thankful for the trust and confidence you have placed in us. This means more to us than you know. Thank you and happy Holidays and best wishes for a healthy, happy and prosperous New Year!
The views stated in this piece are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.