Hollywood, and movie audiences, love a good sequel – and there are no shortages this holiday season with the likes of Gladiator 2, Moana 2, and Karate Kid hitting the screens. But there was no bigger sequel than the political one we received just a few weeks ago: President Trump 2.0. Contrary to the “toss-up” consensus prior to the election, Trump pulled off a decisive political victory, with Republicans claiming the presidency, Senate, House, and winning the popular vote by over 2.5M votes. With the scope of this victory, Trump has wide berth to implement an aggressive agenda and has wasted no time in building his team and cabinet. Now that we know the star and supporting cast of this political sequel, what will the plot look like, and how will it affect the markets?
The knee-jerk reaction to the election has certainly been positive – the market rallied over 3% in the days immediately following the election and is up 4.5% total from Election Day through the end of last week, 11/22. Pre-election, business uncertainty was at its highest on record as reflected in the National Federation of Independent Business (NFIB) survey taken from October data. Whether Trump was the cause of, or a solution to, this uncertainty is certainly a matter up for debate, but we do know that the political worst-case scenarios of a contested election did not come to pass. Combined with the clear political mandate, some of the fog has cleared from investor’s minds and boosted sentiment.
Source: NFIB
However, there are still pieces to sort out regarding economic policy impacts from a Trump agenda – namely with respect to taxes, trade, and regulation.
Taxes
First on the agenda will likely be the extension of the Tax Cuts and Jobs Act (TCJA) which was the centerpiece legislation of Trump 1.0. Some of the business tax provisions of this legislation have lapsed or will soon, but the individual tax cut provisions are not set to expire till the end of 2025. Trump’s proposals not only include keeping the TCJA tax rates intact, but several additional measures such as exempting tips, Social Security, and overtime from income taxes. In addition, Trump has indicated he would like to lower the corporate tax rate from 21% to 15%. Trump does not have a filibuster-proof majority and will likely resort to using the reconciliation process to get things passed, so we expect both intra- and interparty compromises to be made as they were the first go-round in the TCJA. Nevertheless, most strategists and analysts are penciling in a boost to GDP and profits from a lower potential tax burden over the next few years.
Trade
The biggest wildcard on Trump’s agenda will be with respect to trade and potential tariffs. We know from Trump’s first term and his campaign rhetoric that tariffs will be a tool readily at his disposal, and a second Trump administration will likely bring a more assertive approach. They key question will be whether these tariffs will be applied indiscriminately in a blanket approach, or in a more selective manner that targets specific industries and countries. The selective approach is the more likely scenario, particularly with the recent announcement of Scott Bessent as Treasury Secretary, but an aggressive, widespread tariff approach cannot be ruled out. Under either scenario, analysts expect a drag to GDP growth from potential retaliatory impacts and lower demand, and a bump to inflation as these added costs are potentially passed through to consumers.
Regulation
On the regulatory front, we can expect an additional thrust of deregulation, similar to Trump’s first term. Financials are the best performing sector in the market year to date, with much of that outperformance coming post-election as the market bakes in discounts that Trump will take a lighter touch on financial regulations and merger approvals. On the Energy front, we expect a focus on increased fossil-fuel production and streamlined regulations with the goal of energy independence and reducing energy costs for consumers. Where Trump may stray from the “deregulatory” agenda will be with respect to anti-trust enforcement and big tech. Trump was more aggressive on merger enforcement in his first term than even President Obama, and Vice President-elect JD Vance has been a vocal advocate for anti-trust measures against the major tech companies.
Taken altogether, Trump policies will be a mixed bag regarding potential impacts for both the market and the economy. The stimulative effects of lower taxes and deregulation are being counter-balanced by the near-term negatives of tariffs and restrictive trade policies. Estimates vary, but Goldman Sachs calculates the net effect to GDP between taxes and trade, assuming less draconian tariff scenarios, as largely offsetting. However, the timing of these impacts may be staggered with a tariff impact felt sooner, while tax impacts hit later. What should be noted however is that these impacts should be marginal with no more than a 0.5% impact to GDP in either direction. We encourage you not to let the noise and elevated level of political press distract from the reality that the core, underlying business cycle still drives the markets, and political policies play at the margins.
Where we are watching very closely is the interest rate market. US 10 Year yields have made an aggressive move higher since September, reflecting the dual effects of both higher growth prospects (lower taxes and deregulation) and higher potential inflation (tariff impacts). Given that market-derived inflation expectations have remained subdued so far, the recent higher move in rates looks more attributable to higher potential growth prospects (a good thing) vs. accelerating inflation (a bad thing). However, a more aggressive Trump tariff regime would certainly boost inflation expectations which may slow the pace of Federal Reserve rate cuts projected over the course of the next year.
In addition, there is still the matter of the seemingly intractable budget deficit. Little lip-service to the deficit was applied on either side of the aisle during the campaign. Higher economic growth can certainly help, but government spending is the issue, not revenues. With a nod to these concerns, Trump has appointed Elon Musk and Vivek Ramaswamy as chairs of the newly formed Department of Governmental Efficiency, but the extent of cost cutting they will be able to achieve remains to be seen. And without any serious discussion around the growth in entitlements, this may be more sound than fury anyway. So far, interest rate markets are taking this in stride, but that may not always be the case.
There will be much to unpack over the coming year as the new administration enters office and begins the challenging work of implementing policy. Like a movie sequel, Trump’s second term policies will certainly mimic many of the same themes and plot points of his first script – but this time with more artistic license and “political budget.” But also like many movie sequels, often the end-product does not live up to the hype, and we remain focused on the larger drivers of the economic cycle like overall corporate profitability, employment, and interest rates.
Investment Commentary: President Trump – The Sequel
By Jonathan McAdams, CFA®
Hollywood, and movie audiences, love a good sequel – and there are no shortages this holiday season with the likes of Gladiator 2, Moana 2, and Karate Kid hitting the screens. But there was no bigger sequel than the political one we received just a few weeks ago: President Trump 2.0. Contrary to the “toss-up” consensus prior to the election, Trump pulled off a decisive political victory, with Republicans claiming the presidency, Senate, House, and winning the popular vote by over 2.5M votes. With the scope of this victory, Trump has wide berth to implement an aggressive agenda and has wasted no time in building his team and cabinet. Now that we know the star and supporting cast of this political sequel, what will the plot look like, and how will it affect the markets?
The knee-jerk reaction to the election has certainly been positive – the market rallied over 3% in the days immediately following the election and is up 4.5% total from Election Day through the end of last week, 11/22. Pre-election, business uncertainty was at its highest on record as reflected in the National Federation of Independent Business (NFIB) survey taken from October data. Whether Trump was the cause of, or a solution to, this uncertainty is certainly a matter up for debate, but we do know that the political worst-case scenarios of a contested election did not come to pass. Combined with the clear political mandate, some of the fog has cleared from investor’s minds and boosted sentiment.
However, there are still pieces to sort out regarding economic policy impacts from a Trump agenda – namely with respect to taxes, trade, and regulation.
Taxes
First on the agenda will likely be the extension of the Tax Cuts and Jobs Act (TCJA) which was the centerpiece legislation of Trump 1.0. Some of the business tax provisions of this legislation have lapsed or will soon, but the individual tax cut provisions are not set to expire till the end of 2025. Trump’s proposals not only include keeping the TCJA tax rates intact, but several additional measures such as exempting tips, Social Security, and overtime from income taxes. In addition, Trump has indicated he would like to lower the corporate tax rate from 21% to 15%. Trump does not have a filibuster-proof majority and will likely resort to using the reconciliation process to get things passed, so we expect both intra- and interparty compromises to be made as they were the first go-round in the TCJA. Nevertheless, most strategists and analysts are penciling in a boost to GDP and profits from a lower potential tax burden over the next few years.
Trade
The biggest wildcard on Trump’s agenda will be with respect to trade and potential tariffs. We know from Trump’s first term and his campaign rhetoric that tariffs will be a tool readily at his disposal, and a second Trump administration will likely bring a more assertive approach. They key question will be whether these tariffs will be applied indiscriminately in a blanket approach, or in a more selective manner that targets specific industries and countries. The selective approach is the more likely scenario, particularly with the recent announcement of Scott Bessent as Treasury Secretary, but an aggressive, widespread tariff approach cannot be ruled out. Under either scenario, analysts expect a drag to GDP growth from potential retaliatory impacts and lower demand, and a bump to inflation as these added costs are potentially passed through to consumers.
Regulation
On the regulatory front, we can expect an additional thrust of deregulation, similar to Trump’s first term. Financials are the best performing sector in the market year to date, with much of that outperformance coming post-election as the market bakes in discounts that Trump will take a lighter touch on financial regulations and merger approvals. On the Energy front, we expect a focus on increased fossil-fuel production and streamlined regulations with the goal of energy independence and reducing energy costs for consumers. Where Trump may stray from the “deregulatory” agenda will be with respect to anti-trust enforcement and big tech. Trump was more aggressive on merger enforcement in his first term than even President Obama, and Vice President-elect JD Vance has been a vocal advocate for anti-trust measures against the major tech companies.
Taken altogether, Trump policies will be a mixed bag regarding potential impacts for both the market and the economy. The stimulative effects of lower taxes and deregulation are being counter-balanced by the near-term negatives of tariffs and restrictive trade policies. Estimates vary, but Goldman Sachs calculates the net effect to GDP between taxes and trade, assuming less draconian tariff scenarios, as largely offsetting. However, the timing of these impacts may be staggered with a tariff impact felt sooner, while tax impacts hit later. What should be noted however is that these impacts should be marginal with no more than a 0.5% impact to GDP in either direction. We encourage you not to let the noise and elevated level of political press distract from the reality that the core, underlying business cycle still drives the markets, and political policies play at the margins.
Where we are watching very closely is the interest rate market. US 10 Year yields have made an aggressive move higher since September, reflecting the dual effects of both higher growth prospects (lower taxes and deregulation) and higher potential inflation (tariff impacts). Given that market-derived inflation expectations have remained subdued so far, the recent higher move in rates looks more attributable to higher potential growth prospects (a good thing) vs. accelerating inflation (a bad thing). However, a more aggressive Trump tariff regime would certainly boost inflation expectations which may slow the pace of Federal Reserve rate cuts projected over the course of the next year.
In addition, there is still the matter of the seemingly intractable budget deficit. Little lip-service to the deficit was applied on either side of the aisle during the campaign. Higher economic growth can certainly help, but government spending is the issue, not revenues. With a nod to these concerns, Trump has appointed Elon Musk and Vivek Ramaswamy as chairs of the newly formed Department of Governmental Efficiency, but the extent of cost cutting they will be able to achieve remains to be seen. And without any serious discussion around the growth in entitlements, this may be more sound than fury anyway. So far, interest rate markets are taking this in stride, but that may not always be the case.
There will be much to unpack over the coming year as the new administration enters office and begins the challenging work of implementing policy. Like a movie sequel, Trump’s second term policies will certainly mimic many of the same themes and plot points of his first script – but this time with more artistic license and “political budget.” But also like many movie sequels, often the end-product does not live up to the hype, and we remain focused on the larger drivers of the economic cycle like overall corporate profitability, employment, and interest rates.
Shannon DermodyTEST