The dust has settled, the votes have been counted

The dust has settled, the votes have been counted, and Donald Trump has once again been elected president of the United States. 

The dust has settled, the votes have been counted, and Donald Trump is once again president-elect of the United States.  The question now is, “What does that mean for us?” 

As happens after every election, some people are elated by the result.  Some are upset, and some are indifferent.  All these emotions are understandable.  As your financial advisor, however, I feel it’s important to reiterate that investing and emotions do not mix.  So, if you are happy with the outcome of this election, then I’m happy for you.  But it’s not time to make dramatic changes to your investment strategy.  If you are unhappy, then I give you my sincere condolences.  But it’s still not time to make dramatic changes to your investment strategy. 

With all that said, let’s examine some of the ways that a second Trump term may affect the economy – and by extension, the markets.  Think of these not as predictions, but simply as storylines my team and I will be keeping a close eye on.  Let’s start with:

TRUMP’S TAX POLICY

In 2017, Congress passed the Tax Cuts and Jobs Act, the most significant update to the tax code in decades.  Among other things, the bill reduced tax rates for most corporations and individuals and doubled the estate tax exemption.  These tax cuts are currently set to expire on December 31, 2025.  However, with Trump once again back in the White House, it’s a safe bet that he will look to extend these cuts further. 

But Trump’s tax proposals don’t end with simply renewing the TCJA.  He has also proposed lowering the corporate tax rate to 15%.¹  (It’s currently at 21%.)  Eliminating taxes on Social Security benefits was also a hallmark of his campaign.  Should that happen, it would be a major boon to retirees. So, look for more information from us in the future if this proposal starts making its way through Congress. 

What does all this mean for the economy and the markets?  Well, lower taxes are a good way to juice economic growth, as they can prompt increased consumer spending.  Lower corporate taxes also help companies invest, expand to new markets, and boost profits.  This, in turn, could propel the stock market to new heights.  As investors, that’s exciting! 

However, changing the tax code is rarely as simple as it may seem on paper.  Even if Republicans end up in control of both branches of Congress — which, as of this writing, is not yet certain — it’s not a guarantee this would lead to expanded tax cuts.  Why?  Three words: The national debt. 

Our country’s debt is a bipartisan problem that has swelled under both parties.  Since the pandemic, however, the national deficit, which is the amount by which the government’s spending exceeds its revenue, has shot up relative to its historical average.  It currently sits at $1.8 trillion for the 2024 fiscal year.²  When you couple that with higher-than-average interest rates, it makes it even harder to pay down the national debt. 

Many economists project that new tax cuts will only cause the deficit to balloon further.¹  For that reason, even some Republicans in Congress may not have the stomach for more cuts.  Only time will tell here, but it’s an issue we will watch closely as we factor taxes into your overall financial plan. 

 TARIFFS

One of the ways President-elect Trump has proposed to offset those tax cuts is through the use of tariffs.  It’s a familiar tactic for anyone who remembers his first term in office.  The tariffs he proposes this time, however, are on a different order of magnitude altogether.

Put simply, a tariff is a tax on imported goods.  Tariffs have historically been used to make buying foreign goods more expensive so that people would buy local products instead.  Think of it as a way of protecting certain American industries from outside competition.  

In his first term, President Trump famously enacted a wide range of tariffs on Chinese goods.  China retaliated with tariffs of its own. This launched a so-called “trade war” that dominated much of the economic discourse until COVID-19 came along.  For his second term, however, Trump has proposed raising tariffs to anywhere from 60% to 100% on Chinese goods…along with a universal tariff of 10-20% on all imports in general.³  Trump believes this will create enough revenue to cover lower taxes and bring down the deficit. 

Make no mistake – tariffs do raise revenue. (For most of our country’s history, tariffs were the government’s prime source of income.  This began changing around the turn of the 20th century when income taxes started becoming permanent.)  The Tax Foundation estimates that a 10% blanket tariff would raise $2 trillion between 2025 and 2034.⁴  A 20% tariff could lift that number to $3.3 trillion.⁴  Whether that’s enough to offset the revenue lost with lower taxes, however, is an open question.  You can easily find arguments for and against it if you look long enough. 

There’s another aspect to tariffs, though, which is probably even more important: How they may impact inflation. 

Historically, higher tariffs do lead to higher consumer prices.  Let’s use the fictional ACME Company to explain why.  Imagine that, to make roadrunner trappers, ACME frequently imports aluminum from abroad.  If they are forced to pay a high tariff on that aluminum, they would have little choice but to raise the price of their traps to continue making a profit.  When these price hikes happen across the board, we call that inflation. 

Now, it’s nearly impossible to predict exactly how much tariffs would drive inflation.  Republicans have a vested interest in saying the effect will be minimal.  Democrats have a vested interest in decrying tariffs as amounting to a 20% sales tax, or higher.  But the truth is much more complicated because economics are rarely so simple.  We know that consumer prices did rise modestly during President Trump’s first term.  However, because the inflation rate was so low when he was first elected, at just 1.7%, the overall effects were minimal.⁵  The same could hold again. 

Of course, things are a bit different this time.  As you know, consumer prices have been the main economic problem facing our country for the last several years.  While the inflation rate has now fallen to 2.4%, people are still dealing with sticker shock — and the Federal Reserve has only just begun cutting interest rates.6  Should tariffs cause inflation to spike, it could lead to both lower spending and a delay in future rate cuts.  Both would likely hurt the economy. 

That said, it’s important to remember that all these potential impacts are both theoretical and months to years away.  There’s no reason to overreact to any of this.  We simply must remain informed about what’s going on, so that if the situation changes, we can adapt accordingly. 

OIL

Many people fondly remember an era of lower gas prices during President Trump’s first term.  For his second, Trump has promised to reduce restrictions on crude oil production.  That would have the effect of increasing the total oil supply, which could bring down gas prices again. 

I mentioned above that economics are rarely simple.  That’s true here, too.  For example, Trump has also proposed leveling new sanctions against Iran and Venezuela – two major oil producers.  That could decrease the world’s oil supply and drive prices higher.  It’s also unclear how much the U.S., which is already the world’s largest oil producer, can increase production.  While decreased regulation would raise the ceiling of what could be produced, the floor is determined by processing and shipping infrastructure. That doesn’t get built overnight.  And some oil companies may not want to increase supply, as lower prices could decrease profits. 

Oil prices, like that of all commodities, are governed by many factors beyond just presidential policy.  In general, though, less government regulation typically boosts the energy industry.  That, in turn, could have a positive impact on certain sectors of the market. 

TWO CAVEATS

As you can see, certain aspects of a second Trump administration could be net positives for the economy.  Others could bring unintended consequences.  But there are two big caveats here.  Two reasons why we shouldn’t make wholesale changes to our plans just because of the election. 

As of this writing, it’s not yet clear which party will control the House of Representatives.  Should the House revert to the Democrats, it would mean a divided government. As a result, some of Trump’s policies could be watered down or shelved.  But even if Republicans control both chambers, change usually comes slowly in Washington.  There are so many opinions, and so many stakeholders, that proposals get diluted or tabled.  Just because a politician proposes X to achieve Y does not mean it will necessarily happen.  That’s why we should adopt a wait-and-see attitude when it comes to Trump’s second term. 

Here’s the second reason we need not overreact to the election results.  History has shown us that the presidency has far less of an impact on the markets than people think.  From 1945 through 2020, the S&P 500 has risen an average of:

• 13.6% with a Democratic president and a split Congress⁷
• 13% with a Democratic president and Republican Congress⁷
• 12.9% with a Republican president and Republican Congress⁷
• 9.8% with a Democratic president and Democratic Congress⁷
• 5.8% with a Republican president and a split Congress⁷
• 4.9% with a Republican president and Democratic Congress⁷

These numbers illustrate an important truth: The stock market isn’t driven by one person or one party.  It’s driven by the ebb and tide of trade.  By the law of supply and demand.  By innovation and invention.  By international relations and consumer confidence. 

The market is an ocean – and politics but a single tributary emptying into the vast, ever-changing sea.  

So, what’s the takeaway?  The takeaway is that you might be happy Trump won, or you might be upset.  Both are perfectly normal, legitimate emotions to feel.  But neither emotion will drive our planning.  Some of his policies will affect the markets positively.  Others may be negative.  Some will have no effect at all.  So, rather than change our investment strategy, we’ll continue to determine how much you need to reach your financial goals.  We’ll continue analyzing how much risk we must take to help you get what you need.  Finally, we’ll position ourselves as best we can to take advantage of future market growth and weather future market volatility. 

We’ll continue helping you work towards your goals by relying on planning.  Not politics. 

I hope you found this message helpful.  Of course, if you have any questions or concerns, please let me know.  That’s what I’m here for.  In the meantime, enjoy the upcoming holiday season!