Post Election Investment Playbook

Wednesday, December 11, 2024

Overview

Our outlook for the markets is broadly the same as it was before Donald Trump won the U.S. presidential election. While the resolution of political uncertainty is a key, near-term driver for stocks the most important outcome is simply having an outcome. As illustrated by the chart below, U.S. stocks have historically risen over the long-term regardless of which party controls the White House. As such, a disciplined long-term investment mantra remains the favored approach.

Another notable outcome of the recent election is that the GOP now controls both the House and the Senate. Understandably, this presents a noticeable shift to the current administrations outlook on many important financial matters. A unified outcome is rather uncommon, especially for the Republican party. Since 1926, it has only occurred in 13 of the 98 years. That said, the best year ever for the S&P 500 was 1954 when Republican Dwight Eisenhower was President, accompanied by a Republican controlled Congress, returning a whopping 53.6%. This is but one interesting piece of statistical analysis that should be considered among a myriad of other factors that influence stock market returns. 

For purposes of this communication, we will focus on some of the more popular talking points and how they may intersect with investment markets.

Taxes

The consensus going into the election was that changes were on the horizon. Many facets of Tax Cut and Jobs Act (TCJA) are scheduled to sunset at the end of 2025 with most market pundits in agreement that tax rates would be going higher. The sentiment surrounding this development has shifted significantly following the election. While most agree that the TCJA reduced tax receivables and expanded the national deficit, it remains entirely possible that the administration that implemented these changes initially may be rather interested to see them extended. In his first term, Trump lowered the top corporate tax rate to 21% from 35%, and during the campaign he promised to lower it again to 15% for many companies. Addressing the national debt is a bipartisan matter, but most avenues required to get us there are rather unpopular. There are two ways to balance a budget, reduce spending or increase revenues. U.S. equity markets rallied following the election with small cap companies leading the charge. A new working group is being formed to identify areas of government inefficiency. How this ultimately plays out is still uncertain, but change seems likely.  

Deregulation

The incoming administration campaigned on a platform of pro-growth policies, which would be expressed at the governmental level via a lowering of regulatory burdens, lower corporate/business tax rates and continued support for re-shoring. The energy and financial sectors pushed notably higher in the days leading up to and subsequent to the election results as reduced regulatory scrutiny is anticipated. The U.S. dollar strengthened against most other major currencies following the election, placing considerable headwinds on non-U.S. investment markets.

The question remains just how inflationary Trump’s policies might be, and their impact on the already-ballooning U.S. budget deficit. The rising debt burden is seen as a pressing risk for the U.S. economy, now at 123% of GDP, compared to 55% in 2001. While U.S. Treasuries play a critical role in global finance, this status relies on market confidence in U.S. solvency. A loss of trust could have global repercussions. Couple that with the rising interest costs associated with the debt and it’s understandable why some concern may be warranted.

Interest rates

As a candidate, Donald Trump promised to relieve consumers of high interest rates and repeatedly said during the campaign that he would bring down interest rates. Historically, interest rates have not been an area influenced by the President. The Fed began cutting short term interest rates in September in response to growing concerns for the employment market. While their efforts do have a way of factoring into longer term interest rates, ultimately those rates are a biproduct of market dynamics. That said, President Trump will get an opportunity to remake the board at the Federal Reserve in May 2026, when Powell’s term is set to expire. There is growing concern that another wave of inflationary pressures may be in the offing should a U.S.-first approach produce higher prices domestically. A combination of fiscal and monetary policies will be needed to combat inflation. Getting that recipe correct will be one of the more pressing challenges facing the administration.

As holiday season comes into focus, we expect greater clarity from the Fed and future policy items from the incoming administration. Financial markets are constantly forecasting, re-pricing, analyzing and updating expectations with countless new data points each day. Momentum continues to favor domestic companies while a healthy economic undercurrent and attractive yields support traditional fixed income. Thoughtful asset allocation and broadly diversified portfolios to enhance resilience will remain foundational as we prepare for the markets ahead. 

Please reach out with any questions and we will do our best to address them.