Viewpoint: Playing the Trump card

While there are still some votes left to be counted, the Republican party has secured the presidency (winning both the Electoral College and the popular vote) and the majority in the Senate (with at least 52 seats), and the odds favour them taking the House of Representatives too.

A fully aligned government for the next two years would mean that the Republican policy agenda will likely go through with little pushback.

While much clearly remains to be determined, this likely means higher tariffs on a wider array of goods (particularly those imported from China, Mexico Japan, and other countries deemed to be “taking advantage of America on trade”) and a prospective 100% tariff on non-US produced vehicles are coming soon, with the potential of universal tariffs on all imports (not just levies targeting specific strategic areas or source countries) being on the table as well.

With respect to other tax policies, big items on the docket are the extension of the Tax Cuts and Jobs Act (TCJA) that is slated to expire next year, exempting various forms of income from taxation (such as overtime pay, tips and Social Security), and lowering the corporate tax rate for domestic manufacturers to 15%.

Regulations on the Financial and Energy sectors are likely to be loosened or fully rolled back, while subsidies related to green energy under the Biden administration’s Inflation Reduction Act (IRA) may be eliminated — there was some talk about the IRA being repealed totally, but given that it passed with some Republican support, spending to this point has disproportionately benefited “red” states, and President Trump’s focus on infrastructure spending during his previous term, that does not seem likely (though that could well change). Increased defense spending is a very high probability.

Debates on funding the government (the Continuing Resolution to avert a government shutdown passed in October is only in effect until December 20, 2024) and raising the debt ceiling (which is set to be reinstated on January 2, 2025) will likely be limited, meaning no threat of a US default this go-around.

The generally expansionary policies are expected to result in wider deficits and more debt. The Committee for a Responsible Federal Budget’s¹ “central” estimate is that Trump’s slate of proposals would increase the federal debt by US$7.75 trillion over the next decade versus the current baseline projection from the Congressional Budget Office² while the Penn-Wharton Budget Model³ projects an increase in primary deficits totalling US$4.1 trillion. These policies would, however, add more of a fiscal impulse to the domestic growth add-up.

US debt government projections under President-Elect Trump’s proposed policy agenda
(percent of gross domestic product)

*”Current law” projections are from the Congressional Budget Office; source: Guardian Capital based on data from the Congressional Budget Office and Committee for a Responsible Federal Budget

The offshoot here, though, is that a growth boost would add to inflationary pressures that would compound the price impact of tariffs (which are paid by the American importer, not the foreign exporter) and the potential upward pressure on labour costs that comes with stricter immigration policies.

As a result, this could have implications for the path of monetary policy stateside — as would the potential for the US Federal Reserve (Fed)’s independence being tested by the President-elect (and note that current Fed Chair Jerome Powell’s term is up in 2026), something that was brought up in the Chair Powell’s press conference4 following the Fed’s policy decision on Thursday.

From a market perspective, the corporate tax and regulatory policies are clearly positive for profitability and thus constructive for US equities, however, tariffs and the related likelihood of a stronger US dollar likely will have less beneficial impacts on margins — and these factors carry significant implications not just in the US, but for foreign markets as well.
A return of the backdrop of generally higher volatility and geopolitical uncertainty that characterized the 2016 to 2020 period also suggests that risk premia in the market could rise.

The prospect of greater inflationary pressures and the resultant influence on monetary policy (i.e., higher terminal rates) combined with the impact of bigger deficits and increased debt issuance in the absence of central bank bond-buying suggest that longer-term interest rates could remain elevated as term premia increase, resulting in a steeper yield curve and providing a headwind for fixed income performance.

With that said, it has historically been the case that all asset classes have fared well and generated positive real/inflation-adjusted returns in a Republican-dominated government in the post-World War II era, though split governments have tended to yield the best relative outcomes.

Inflation-adjusted asset class performance during Congressional term by composition of US federal government
(annualized percent change; US dollar basis)

*Data cover the 79th to 118th Congresses (1945 to current) and are deflated by the US consumer price index; **Stocks=S&P 500 Total Return Index; *** Bonds= 10-year US Treasury Note Total Return Index; ****60/40=fixed weighted portfolio of 60% stocks and 40% bonds; source: Guardian Capital based on author’s calculations using data from Bloomberg and Robert Shiller data.
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David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP) and provides macro-economic guidance to GCLP and its affiliates—Alta Capital Management LLC and GuardCap Asset Management Limited.

1 Committee for a Responsible Federal Budget, US Budget Watch 2024, Papers, The Fiscal Impact of the Harris and Trump Campaign Plans, October 28, 2024, https://www.crfb.org/papers/fiscal-impact-harris-and-trump-campaign-plans
2 Congressional Budget Office, Budget and Economic Data, 10-Year Budget Projections, November 8, 2024, https://www.cbo.gov/data/budget-economic-data#3
3 Penn Wharton, University of Pennsylvania, Budget Model, The 2024 Trump Campaign Policy Proposals: Budgetary, Economic and Distributional Effects, August 26, 2024, https://budgetmodel.wharton.upenn.edu/issues/2024/8/26/trump-campaign-policy-proposals-2024
4 Federalreserve.gov, Transcript of Chair Powell’s Press Conference, November 7, 2024, https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20241107.pdf

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Published: November 8, 2024