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I feel like I am going out on a limb here to share my thoughts on what our economy and market might look like under President-elect Trump. I have clients across the entire political spectrum – some liberal, some conservative, and most somewhere in the middle.
Of course, I have my own political views, but I understand that these are my personal opinions and not necessarily others. It would be pretty brazen of me to project my political views on a financial blog that is sent out to thousands of people. So, I usually avoid politics like the plague when I write (I save these conversations for my wife—she loves it when I talk politics at home).
This election cycle will usher in many economic changes that will impact just about every market in the world. Tax cuts, tariffs, and deregulation will have enormous effects. We manage close to $200m, so it is my job to ensure that my clients are properly invested. Trump will undoubtedly have an impact on the financial markets. He already has. There are both risks and opportunities in abundance on the horizon. It is my job to consider all of this and allocate accordingly. –Ryan
The Trump Trade
As I write this, on Friday, Nov. 8th, the Republicans will likely win the House of Representatives, gaining full control of Congress and giving Trump significant latitude to pursue his agenda.
I have spent the past few days trying to make sense of what this will mean for the U.S. economy and markets. In short, it is impossible to truly know how things will shake out over the next four years. Yes, Trump will be working with a unified Congress, but that does not mean that everything he wants to pass will get passed. Not everyone in Congress is his biggest fan, and he is bound to get pushback at every step of the way.
Nonetheless, I thought it would be helpful to share at least some of my thoughts and how they will impact U.S. businesses and consumers.
President-elect Trump’s Agenda
Trump’s economic agenda can be boiled down to 3 different policies:
Tax Policy
- Extension of 2017 Tax Cuts: Trump plans to make the individual and corporate tax cuts introduced during his first term (the Tax Cuts and Jobs Act—TCJA) permanent, which are set to expire in 2025. If you care to take a trip down memory lane, I first wrote about Trump’s proposed tax cuts policy back in 2016.
- Further Corporate Tax Reduction: He proposes lowering the corporate tax rate from 21% to 15% for companies manufacturing domestically, aiming to boost U.S. production.
- Elimination of Specific Taxes: Trump suggests removing income taxes on Social Security benefits and exempting tips from taxation to increase disposable income for retirees and service workers.
Trade Policy
- Universal Tariffs: A proposed 10% baseline tariff on all imports seeks to protect domestic industries and reduce reliance on foreign goods. This universal tariff would encompass all goods from all countries, including Mexico and Canada, superseding the United States-Mexico-Canada Agreement (USMCA), which basically ensures tariff-free trade among these nations.
- Targeted Tariffs on China: Trump is pushing for a 60% tariff on Chinese imports to address trade imbalances and unfair practices. The U.S. currently imposes tariffs ranging from 7.5% to 25% on various Chinese goods, which were implemented during Trump’s first term. The new 60% tariff would be universal on all goods.
Regulatory and Government Efficiency
- Government Efficiency Commission: Trump hopes to establish the Government Efficiency Commission (GEC), led by Elon Musk, to identify and eliminate government inefficiencies. The idea is to shrink the size of the U.S. government, which is quite inefficient and hinders economic growth. We are currently running a $1.8T budget deficit, and Elon Musk has stated that he hopes to close this gap through the efforts of the GEC alone.
How Trump’s Policies Will Affect Us
The million-dollar question is how these economic policies will affect us. Ultimately, we don’t know. We are not sure of the size and scale of these proposed policies or in what market context they will occur.
However, it is still very useful to break them down and at least get a sense of what can happen. Here are a few things that I am thinking about.
Tax Cuts, Tariffs, and International Stocks
The recent market rally over the past few days is in response to an increasing probability of corporate tax cuts and government deregulation.
The corporate tax cuts might be an extension of the 2017 tax cuts, removing income taxes on Social Security benefits, and exempting tips from taxation.
Again, who knows whether this will really pass or not. But the idea is this: a corporate tax cut from 21% to 15% might not seem like a big deal at first glance, but it has massive consequences. It expands the profitability ratio for every American corporation. If this gets passed, all of a sudden, the U.S. stock market doesn’t look as expensive as it once was. This will be a major tailwind for U.S. stocks.
International stocks, on the other hand, don’t look quite as appealing. If Trump begins to wield tariffs as a weapon, those international companies that rely on shipping goods to the U.S. will look a lot less attractive, especially with a stronger U.S. dollar.
I am especially concerned with emerging market stocks, which not only have to contend with their own shaky economy but also a suddenly stronger U.S. dollar, which is putting further pressure on their earnings.
Note that we sold all emerging market stocks and increased our U.S. stock and bitcoin allocation before the election for this reason and a few others. The landscape has changed.
A Smaller Government
Trump is planning to establish a Government Efficiency Commission, potentially led by Elon Musk, to identify and eliminate government inefficiencies. The idea is to conduct a thorough audit of all federal agencies, find inefficiencies and areas of waste, and eliminate them. The final step is to recommend drastic reforms to streamline government operations and reduce bureaucratic red tape.
Right now, the U.S. government is running a $1.8T deficit, which means that we are simply adding another $1.8T onto the government charge card. Liberal or conservative, this is not good news. It is bad for all of us. I am all for finding a way to at least run a balanced budget—it is long overdue. The best-case scenario? We find a way to run a budget surplus and pay down our $36T debt load.
Believe it or not, the concept of cutting government programs has been introduced before. President Clinton launched the National Partnership for Reinvesting Government during his administration with the same idea: cut costs and simplify government. It worked. The last time our country actually ran a budget surplus was during his administration.
Higher Inflation
The big central theme in economics that has been occurring since COVID, and will certainly continue under Trump’s agenda, is de-globalization. Trump’s trade policy of using tariffs as a primary revenue source for the U.S. government is extremely protectionist and will certainly impact the U.S. inflation rate.
A big reason why Trump is going after foreign goods is that he is attempting to reverse the trend of the U.S. outsourcing its manufacturing jobs. This hollowing out of U.S. jobs started in 1994 with the North American Free Trade Agreement, which accelerated the outflow of millions of jobs, many of them union jobs, to Mexico, China, and other countries.
Under Trump’s proposed tariff plan, countries that send their goods to the U.S. will pass along the tariff cost to the consumer. This has been the case in the past and will continue in the future. If a company is exporting a T-shirt to the U.S. for $10.00 and the tariff is 20%, then simply put, the goods that arrive in the U.S. will be $12.00, 20% more expensive. This is inflationary.
Furthermore, a tariff policy like this will hamper competition. Remember, the more competition there happens to be in an industry, the more price pressure there is. Competition is a win for the end consumer. Higher tariffs will impede this. Less competition = higher prices.
Conversely, if Trump’s policies actually boost manufacturing and help increase American wages, this will be a major economic boost. This could also result in higher inflation levels. If corporate profits increase, wage growth will accelerate. And higher levels of wage growth generally result in higher inflation expectations.
There is a decent chance that the U.S. economy will accelerate more than expected. Stock prices are already a bit frothy at these levels. If bond yields jump in anticipation of higher inflation, those attractive yields could put pressure on stocks and other risk assets.
Final Thoughts
It might be tempting to sell stocks or other risk assets as we enter into this new era of uncertainty. This, of course, would be a mistake. Should you make some tactical changes? Maybe. Should you make drastic changes based on emotion? No, never.
Predicting the future impact of President-elect Trump’s proposed policies is near impossible. The man has a history of surprising the world, so we shouldn’t expect anything different. We are dealing with a blend of tax cuts, trade disruptions, and government reform- all of which will change the global economic landscape.
My job as a portfolio manager is to weigh these factors, adapt as needed, and help our clients understand the landscape. I suspect this won’t be the only time I write about Trump’s policy changes during the next 4 years, so stay tuned.
