A Second Trump Term
Despite getting an extra hour of sleep with the end of daylight savings time, I’m guessing no one was prepared for the tumultuous week we just had. Over the last six weeks, the word “election” was mentioned on 100 earnings calls of S&P 500 companies according to CNBC. The end of this election season marks two things: no more texts begging for money, and the most expensive election season in American history. A projected $15.9B has been spent on the presidential and congressional campaigns compared to $15B in 2020 and only $6.5B in 2016. The clear winner of this year’s presidential election is the advertisers.
Markets reacted strongly to the outcome of the election on Wednesday, as it was determined that President Trump would be returning to the White House. Markets jumped approximately 3% on the news factoring in potential changes in the years ahead. This weekly email is apolitical to the best of my ability, but it is worth looking at what a second Trump term may look like for the economy and markets. Among the first “Trump trades” was Bitcoin which surged to a record $75,300 counting on Trump to appoint regulators who would be friendly to the asset class. Treasury yields rose in a bet that Trump’s policies, including tariffs and tax cuts, could reignite inflation, while the U.S. dollar hit its highest level in a year for the same reasons. More specifically, let’s look at five areas that could be impacted:
Taxes: You may remember the Tax Cuts and Jobs Act (TCJA) was passed in 2017 but has a sunset provision expiring many parts of the plan at the end of 2025. The biggest impact is on individuals in regard to the standard deduction and the estate and gift tax. A second Trump term not only see the tax cuts made permanent, but the expansion of cuts to reduce the corporate tax rate from 21% to 15%, and the end of taxes on tip income, overtime, and Social Security benefits. Economists believe making permanent and expanding tax cuts could increase the national debt by upwards of $4T to $8T over the next ten years.
Trade: On the campaign trail President Trump stated he’d like to put a 10% tariff on ALL goods coming into the United Stated. Additionally, he wants to impose an added tariff of up to 60% on goods coming from China. While this sounds great, most economists say it isn’t as simple as believing someone else will pay for these tariffs. It is likely the tariffs will drive the cost of goods higher and perhaps bring back an increase in inflation. Further, don’t think foreign countries won’t retaliate. The impact could be a general global slowdown leading to an economic slowdown both at home and abroad.
Deregulation: Over the past four years, the Biden administration has gone after the largest companies in a renewed effort to crack down on what it believes are monopolies. The antitrust lawsuits have, rightfully or wrongfully, had a chilling effect on mergers and acquisitions across a host of sectors and industries. It is likely that, under President Trump, many of the agencies tasked with overseeing companies may give more leeway to companies. This could mean a resurgence of M&A activity, a renewed expansion of domestic energy production, and a relaxation of EPA regulations. These effects will be felt far and wide.
Energy Sector: It is no secret that President Trump favors fossil fuels. Climate change will likely take a backseat to expanded drilling and production; however, it is not clear that it will be the end of clean energy. It turns out people in red states like subsidies just as much as people in blue states. With many of the subsidies going to red states, not to mention Elon Musk potentially playing a part in the next administration, it seems possible we could have a little of both: fossil fuels and green energy.
Immigration Policy: This one is perhaps the most wrought with conflict. I will navigate clear of the political and instead focus on the economic impact. Fewer potential workers will likely drive up wages. Paychecks will increase but so too the cost of said labor which will be passed on to consumers in the form of higher prices. Again, inflation could be the big winner.
At the end of the day, there are too many variables to account for and simply too many unknowns. Clearly the stock market liked the idea of less regulation and lower taxes and as investors that is a win. As for the long-term impact of potential reforms, we will have to wait and see what happens. What the Federal Reserve does regarding interest rates is also now in flux. We could reasonably expect another 0.25% rate cut in December, but what 2025 looks like is anyone’s guess. At the end of the day, what we are concerned about has as much an impact on our outlook as our mental health. Focusing on what is in our control is about all we can do. The markets will continue to go up and down as they have ad infinitum. Let’s all come together and work hard to ensure the markets continue to rise.
Bruce J. Mason, MBA