Clients and Friends – Now a week after the election, investors, professional money managers and the financial markets have had a few days to digest, analyze and ponder what many would say was a surprise outcome. Surprise or not, it is now commonly believed that this outcome of a Trump/Republican victory is a sea-change event that will vigorously and relatively quickly change policies and personnel that will impact everything from geopolitical dynamics to domestic social policies and everything in between.
Things have changed. I will not analyze or judge the election outcome one way or the other; however, I will highlight the topics that I feel will affect you as an investor in the coming months and years. To that end, below, I am paraphrasing the ideas shared by a collection of the investment managers I consult in our practice. In general, their thoughts reflect our beliefs. To be concise, I will keep this commentary to economic/market matters and, though critically important, will not address the many social/cultural/environmental topics that may change under this new regime.
A 30,000-Foot View on Macro Trends and Implications
The magnitude of U.S. President-elect Donald Trump’s victory on Tuesday brings a mandate for his economic, governance, and foreign policy agenda. Winning the Electoral College and popular vote, as well as gaining Republican control of the Senate (and likely the House), means Trump’s key policy issues, such as tax cuts, higher tariffs, and immigration curbs, may come faster than expected — potentially in the early months of 2025. While the devil is in the details, which we will learn more about in the coming weeks, here are the broad issues I am evaluating as we consider investment opportunities and risks.
• Clarity in election results and a clear mandate is good for market confidence. Trump has won decisively, and the U.S. has avoided a political legitimacy crisis. Trump gained not only the support of working-class white men, but also many Black and Latino voters, underscoring the importance of inflation, immigration and national security as key issues that swayed voters. Republicans have regained the Senate, which means the new administration will have momentum to push through its policy initiatives. Trump and a Republican-controlled Senate will have the power to quickly confirm heads of key federal agencies. The organization of Trump’s team has advanced substantially since he first took office in 2017. From the steps taken in these first few days, it is clear that the Trump 2.0 White House will be better prepared and have a better opportunity to move forward than the organizational cluster that was Trump 1.0. Markets like clarity, hence the recent surge in US equities.
• The Pro-Growth agenda is real, but Trump's policies risk reinflation and increasing debt. Trump inherits a U.S. economy that remains in decent shape, owing to a generally strong consumer, albeit with lower-end weakness, and a primarily stable labor market. We expect the President-elect to implement a fiscal package fueling a pro-growth outlook. The combination of impactful deregulation, lower taxes and higher public spending should not be underestimated in terms of their potential shot of economic adrenaline. While good for the economy (and financial markets) in the coming months, over the long term, there comes risk with this reflationary approach. Add that to the already ever-increasing Federal debt, and there are financial imbalance issues that must, at some point, be dealt with down the road.
• Promised tariffs and immigration actions risk slower growth and higher inflation, eventually. If the proposed tariffs are enacted, they will be at their highest level since the 1940s. As proposed, China would feel the brunt of the tariffs. Whether tariffs are enacted as proposed or merely a negotiating tactic remains to be seen. However, arguing that tariffs would not cause a pickup in inflation is challenging. It would take time and abundant financial resources to produce goods domestically that are currently being imported. Fewer immigrants, legal and illegal, implies slower growth in labor supply, so slower economic growth overall. Slower immigration also implies slower population growth, which would moderate the growth in consumer demand. There are also effects at the industry level. Immigrants are a key component of labor supply in agriculture, restaurants and other low-wage industries, so a reduced supply will drive up labor costs and prices. In sum, the tariff and immigration policies may be felt with higher prices (a bit more inflation), even as overall economic growth slows.
The Markets Now and Possibilities Going Forward
As for how markets are reacting, investors' initial response to news of the Trump victory can be summed up by "American Exceptionalism." Many U.S. stocks soared, and most foreign names weakened. The dollar rallied, and many other currencies shed about one to three percent. U.S. financials led the rally with hopes of reduced regulations. Stocks offering high dividend yields were sold in sympathy with the weak bond market/higher interest rates. As we have shared before, in specific sectors equity valuations stretched even further past the historic comfort zone. We remain cautiously optimistic that financial markets will effectively (though with higher volatility) manage their way through whatever iterations of these issues ultimately come to be. But as always, we remain diversified as there are reasons for concern. In the coming days and weeks, we will see which of the three broad paths Trump 2.0 will take, and those will influence market volatility and direction.
• The first scenario is that Trump is unbound by the political winds that last term made Trump 1.0 a somewhat mainstream Republican administration. Now feeling more empowered by the decisive vote, he goes through with the extremes of his policies: stringent immigration policies, extremely high tariffs, and then using that tariff revenue to attempt to offset more significant cuts to corporate and individual taxes. We believe this scenario leads to high inflation and an initial pop to GDP growth because of this stimulus. Over the long term, this approach could lead to a global trade war, interest rates rising uncontrollably, and create a hit to GDP due to all these factors converging. Not good for stocks and bad for bonds.
• The second approach is that with the Republican mandate in hand, Trump sensibly utilizes his political intuition which helped lead to his surprise victories. He modestly cuts taxes and regulations, implements border control but not mass deportation, and uses tariffs strategically. We believe this is almost a status quo situation for the next one to two years, resulting in above-trend GDP growth, but also with inflation that holds back the Fed from cutting rates back to neutral or easing territory. Good for stocks (though valuations are still a concern) and calming for bonds.
• The third scenario combines the two approaches with a sense of fiscal responsibility driven by the increased role of people like Elon Musk, who has reckoned that he could remove $2 trillion from the Federal Budget (more than the Federal government spends on discretionary spending). Honestly, this seems like the least likely scenario because it would combine some of the most unpopular policies (cutting Federal programs and employees), and that the Republican party still has to get reelected despite Trump being termed out. Great for stocks and bonds, but can it actually happen?
We hope that scenario number two is the most likely outcome, and for now, the financial markets seemingly agree.
I hope this overview is helpful to you. Please let James or me know if you want to discuss this in greater detail.
Wishing you and yours much joy as we enter the holiday season. And, Go Buffs! Bob Webster
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.