What Do the Markets Expect After the Election Results?

The recent election results, culminating in a Republican sweep of the presidency, Senate, and House, have ushered in a new political era. This shift in power dynamics is likely to precipitate changes in fiscal, regulatory, and monetary policies, which could have profound implications for the U.S. economy. Here’s what investors should be watching.

Taxes, Debts and Deficits

Many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to be revisited in 2025, including individual, corporate, and capital gains tax rates. These adjustments could significantly affect individual investors, businesses, and the U.S. debt and deficits.

There is anticipation that Trump will advocate for making the TCJA tax cuts permanent. However, any major changes will necessitate Congressional approval. Addressing the unprecedented levels of debt and deficits could be critical in negotiating the terms of a final tax bill. The Congressional Budget Office estimates that, under Trump’s comprehensive policies (not exclusively tax-related), the national debt could rise by $7.75 trillion over the next ten years. As lawmakers consider the relationship between revenue and spending, the eventual tax policy changes may end up being more moderate than those proposed during the campaign.

Source: CRFB.org

Trade and Tariffs

In contrast to tax policy, which necessitates legislative approval, U.S. trade and tariff policy can frequently be influenced and, in certain instances, directly enacted via executive order. Taken together, Trump's proposals increase tariffs on Chinese goods and impose a potential universal tariff could have adverse consequences for economic growth and exert upward pressure on inflation. These measures could result inan increase in inflation and a decline in GDP.

Tariffs are government-imposed taxes levied on imports at the point of entry into a country. While often employed as a protectionist measure to encourage domestic consumption, tariffs can result in higher consumer prices as businesses pass on increased costs. Moreover, they can provoke retaliatory actions from global trading partners, as evidenced by the US-China trade conflict that commenced in 2018. The imposition of tariffs increases the likelihood of renewed trade disputes, which can contribute to economic uncertainty and risk.

Although inflation is moderating, the imposition of higher tariffs could exacerbate inflationary pressures by increasing consumer costs and disrupting supply chains. These factors could contribute to higher interest rates, slower economic growth, and reduced corporate earnings.

Deregulation

A second Trump administration is likely to prioritize deregulation. While increased U.S. crude oil production could exert downward pressure on oil prices, the oil and gas industry are expected to benefit from reduced regulatory burdens. The financial services sector may experience decreased regulatory oversight, potentially stimulating banking activity and mergers and acquisitions. The pharmaceutical and biotechnology industries could also benefit from accelerated drug approval processes. Additionally, cryptocurrencies and blockchain may receive favorable regulatory treatment, while the broader technology sector and AI policy could be subject to less federal scrutiny.

Conversely, the clean energy sector and the electric vehicle industry may face increased challenges due to potential rollbacks in clean energy tax credits and reduced federal support.

Certain areas are likely to receive bipartisan support, including the development and reshoring of the semiconductor industry, as well as broader national security concerns such as defense spending and cybersecurity.

Stay Focused on the Long Term

Investor doubts may seem especially prevalent during presidential election years when campaigns spotlight the country’s challenges. Yet even with election year rhetoric amplifying the negative, it’s important to focus on your vision for the future.

Beliefs about which political party is best for the markets might discourage you from investing. But as you can see from the chart, whether a Republican or a Democrat claims victory hasn’t been a deciding factor in how a $10,000 investment made at the beginning of an election year looked 10 years down the road.

Keep in mind the following:

• Successful long-term investors stay the course and rely on time rather than timing.

• Investment success has depended more on the strength and resilience of the American economy than on which candidate or party holds office.