Market Insight - November 2024
In the week following the U.S. presidential election, the stock market has taken on the persona of a kid in a candy store. The anticipation of favorable tax policy and less regulation from President-elect Trump’s incoming administration overshadowed some of the potentially less savory economic aspects of his campaign rhetoric to send stock prices to fresh all-time highs. In this letter, I hope to communicate our thoughts on the impact that, what appears to be, a “red sweep” may have on the economy and capital markets.
IMMEDIATE RESPONSE FOLLOWING THE ELECTION
While the stock market displayed its approval of another Trump administration in the days following the election, we believe that the initial reaction may be tempered in the months ahead. Initially, the focus seems to be on the pro-business economic policies espoused by Mr. Trump. Signed into law in 2017 during Mr. Trump’s first administration, the Tax Cuts and Jobs Act (“TCJA”) is scheduled to sunset in 2026, sending taxes higher for most U.S. households. Mr. Trump has suggested that he would seek to extend some or all of the TCJA.
Based on comments made during Mr. Trump’s campaign, expectations are also high for tax cuts for corporations, particularly those in U.S. manufacturing, and less government regulation on U.S. technology and financial businesses. Further, the capital market is also attempting to price in a potentially more favorable anti-trust regulatory environment that may spur more merger and acquisition activity.
Even with all that seemingly good news for investors, perhaps the greatest reason the stock market has surged following the election is that the results were conclusive. The capital markets are always attempting to value investments based on future expectations. When uncertainty clouds the future and presents the potential for a wide range of outcomes, asset prices tend to be subdued until that uncertainty lifts. A decisive election result is lifting some of that uncertainty for investors.
Looking ahead
As with any promises made during a presidential campaign, it’s difficult to know what a candidate’s priorities will actually be once elected and which of those priorities can survive the legislative process. Of course, a red sweep likely increases the chances that Mr. Trump can more easily accomplish his agenda in the coming years. Each of the measures described above are intended to promote U.S. economic growth. However, Mr. Trump may find it more challenging than anticipated to convince lawmakers, whether republican or democrat, that the potential boost to economic growth from these policies will outweigh the negative consequences they may have on inflation and the budget.
Another one of the promises made by Mr. Trump was to increase tariffs on imports, particularly on imports from China. It’s important to know that the U.S. already has tariffs on a wide swath of Chinese goods, from batteries to solar cells to surgical gloves. In fact, many of these tariffs were recently increased under the Biden administration. It’s too early to tell what the result of the new tariffs promoted by Mr. Trump will be. Too much relies on the ultimate details of what types of goods are included, how much of an increase the tariffs represent and what the anticipated impact would be on domestic goods prices. For example, the Biden administration recently increased the tariff on Chinese electric vehicles (“EVs”) to 100% from the 25% imposed by the prior Trump administration in 2018. While that sounds staggering, the impact has been rather trivial since Chinese EVs only represent about 2% of U.S. electric vehicle imports. That said, most economists tend to agree that tariffs are generally bad for an economy as they restrict trade and may lead to domestic inflation.
One area that we’re fairly certain Mr. Trump will make good on his promises is with regard to immigration. The issue of immigration was high on his agenda during his first term and is very likely to be a priority again in his upcoming term. Immigration policy is a divisive economic and social issue. We believe that immigration is a net positive for economies like the U.S., greater Europe and Japan given the otherwise aging demographic and declining birth rates in these economies. During the Biden administration, immigration has surged. Mr. Trump will assuredly act swiftly to dramatically slow that pace.
examining the bigger picture
As I’ve commented in previous letters, the global economy is vastly complex. It’s a mistake to look at any one of the economic issues discussed in this letter without a proper respect for the dynamic nature of global markets. We need to be careful to evaluate the policies of Mr. Trump’s second term in a broad context and beyond the headlines.
The election results have left many Americans feeling disheartened, underrepresented, and fearful. Still others may feel a renewed sense of optimism. The respectful expression of and compassion for these feelings is important. As your trusted advisor, we’re not immune from these same feelings. Yet, our discipline is to set aside our emotions when evaluating investment opportunities and risks. The past week has been an emotional one and we just urge caution when making financial decisions during periods of heightened emotions.
Final thoughts
It's difficult at this stage to come to any conclusions, for which we have a high level of conviction, regarding the next Trump administration’s effect on long-term capital markets. As noted earlier, the initial thrust of the stock market has been positive. This upward momentum may be extended as the Federal Reserve continues toward reducing interest rates and investors weigh the opportunity cost of $7 trillion now accumulated in money market funds. At current stock market valuations though, risks to the downside such as a return of inflationary pressures and/or an increase in unemployment could result in heightened volatility and a sharp correction.
We continue to believe that the U.S. stock market represents a strong, long-term investment opportunity and a powerful tool to grow wealth over time. We also believe that bonds represent a stronger ballast in diversified investment portfolios than they have for the better part of the past two decades. Short-term fluctuations in the capital markets are to be expected and the unpredictability of these gyrations lay the foundation for why we believe remaining disciplined and diversified are critical to a successful long-term investment strategy.
As we approach the Thanksgiving holiday, I want to make sure you know how grateful we are for the relationship that we have with you. We are overjoyed to be part of your life and are always happy to meet with you to navigate life’s challenges and celebrate its blessings.
Gratefully yours,
Steve Dixon, CFA®
Investment Manager
Dana Brewer, CFP®, Bridget Handke, CFP®, Damian Winther, CFP®, Rachel Infante, CFP®, Kimmie Moehring, CFP®, Brayden Kelly, BFATM
Opinions expressed are not intended as investment advice or to predict future performance. No independent analysis has been performed. Investment decisions should not be based on information in this letter since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources, however we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Rebalancing may be a taxable event. Before taking any specific action, be sure to consult your tax professional.
