The U.S stock market shot up Wednesday with the Dow Jones Industrial Average gaining 3.6% to close at a new record high. It was the index’s best day in two years and the highest gain the day after a U.S. election in history.
The financial celebration may strike some investors as odd, especially those who consider Trump a threat to democracy, geopolitical stability, international trade, civil rights, human rights, women’s rights and basic human decency. However, the stock market does not care about how anyone feels; it is a cold, dispassionate judge of corporate and economic fortunes, good or bad. The bottom line is Trump’s agenda of deregulation and tax cuts will be warmly received by the corporate sector.
Investors should look back at Trump’s first term in office and use that as their baseline. Over those four years, the S&P 500 index gained a little more than 50%, or roughly 12% per year on average, depending on which timeframe you use. Pretty good, considering there was a global pandemic at the time, which saw the S&P 500 plummet by more than 30%.
In addition, Trump tends to view the stock market as a measure of the economy, and a bull market as a personal badge of honour. Maybe questionable from a policy perspective, but for the stock market, probably a pretty good sign.
Over the long term, how the markets react will come down to monetary and fiscal policy. Here is what Kristen Hooper and Andy Blocker from Invesco Canada believe what Trump’s win may mean for the markets and economy.
Policy platform
- Pursue “America First” agenda.
- Implement universal baseline tariff of 10%.
- Increase tariffs on Chinese goods to “more than 60%.”
- Impose 100% tariff on cars made outside the US.
- Use blanket tariffs to penalize companies that outsource US jobs.
Market implications
- Policy uncertainty. A period of trade policy uncertainty could potentially weigh on markets until greater clarity emerges.
- Strong US dollar. Despite the latest reporting that Trump is considering forcing a weaker dollar to encourage exports, the US dollar would likely strengthen amid expectations that policies would result in stronger US growth compared to the rest of the world.
- Protection for select industries. Tariffs on European and Chinese goods could benefit US companies in certain industries, such as steel, aluminum, and paper.
Tax Policy – Policy platform
- Cut funding for the Internal Revenue Service.
- Cut corporate tax rate to 15% for companies that produce their goods in the US.
- Remove tax from Social Security benefits.
- Work with Congress to make individual tax cuts for US taxpayers above and below $400,000 income level and estate tax thresholds permanent.
- Could extend the Tax Cuts and Jobs Act (TCJA) special 20% tax deduction for pass-through businesses that are set to expire.
- Withdraw from or renegotiate the international tax agreement.
- Remove tax on tipped income and overtime pay.
Market implications
- Reduced demand for tax-advantaged investment vehicles. Historically, there has been lower demand for them during periods of lower taxes.
- Real estate investment trusts (REITs) are likely to benefit. If the special 20% pass-through tax deduction is extended, that would allow REIT shareholders to deduct 20% of taxable REIT dividend income they receive, not including dividends that qualify for capital gains rates.
Immigration – Policy platform
- Implement a sweeping mass deportation program to remove all illegal immigrants from US.
- Issue executive orders to place conditions on immigration.
- Resume the building of wall at US southern border.
- End automatic citizenship for children of undocumented immigrants born in US.
- Partner with local law enforcement on “catch and release” strategy.
Market implications
- Negative impact on certain industries. Those that utilize immigrants for labor, such as hospitality, health care, manufacturing, construction, and agriculture, could face challenges like higher labor costs and lower profit margins.
- Potential demographic and growth challenges. The birth rate for US citizens is relatively low.
Federal Reserve (Fed) – Policy platform
- Could resume dovish pressure/rhetoric toward the Federal Open Market Committee.
- Potential plans to make the Fed less independent.
- Uncertain whether Fed Chairman Jerome Powell would be reappointed when his term expires in 2026.
- May propose non-traditional candidates for Fed chairman and governors.
Market implications
- Challenges to Fed independence raise risks to markets. Inflation expectations could potentially reaccelerate, resulting in higher interest rates and lower equity valuations.
Fiscal policy – Policy platform
- Rein in government spending on foreign aid, clean energy and climate mitigation funds, and immigration.
- Protect Social Security and Medicare reforms from benefit cuts.
- Extend tax cuts implemented in first administration.
- Establish “Department of Efficiency” under Elon Musk with goal of cutting $2 trillion in spending.
Implications
- Level of fiscal discipline will depend on whether there’s a split government; if there’s a one-party sweep, we’re likely to see higher fiscal deficits.
Over the long term, the markets tend to do their own thing, regardless of who is in the white house. As investors, rest assured the active money managers are constantly repositioning your portfolios to be in the best position possible to take advantage of this ever-changing world.
Have a great weekend,
Tracey and Paige
Sources:
https://www.theglobeandmail.com/business/article-business-brief-a-red-wave-and-a-sea-of-green
Photo by René DeAnda on Unsplash
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