A second Trump administration: Implications for investments

With Donald Trump heading back to the White House and Republicans regaining control of the Senate, markets are reacting to the expected policy priorities of a second Trump administration. Some election-related uncertainty remains, with the GOP margin in the Senate and control of the House of Representatives still to be determined. The following tips may be helpful for investors thinking about the market outlook:

Earnings growth, profit margins, and valuations typically have more influence on stock market returns than government policy.

Policy can help or hurt individual companies, but well-run companies benefiting from strong demand for their products and services can overcome higher taxes or regulatory burdens; favorable government policy won’t necessarily be enough to rescue poorly run companies facing weak demand.

Constraints are more important than preferences when evaluating potential policy initiatives.

For example, one of President-elect Trump’s legislative priorities will be to extend cuts enacted under the Tax Cuts and Jobs Act (TCJA) before their expiration at the end of 2025. Although his preference may be to extend the TCJA, his ability to do so may be constrained by the composition of the incoming Congress. Although Republicans appear likely to retain control of the House of Representatives, the razor-thin margin in the House would be a constraint that would make it more likely that the TCJA tax cuts would be extended rather than expanded. Although the GOP will have a Senate majority, the 52 to 54 seat majority is likely to be too narrow a margin to push through major changes that would undermine the independence of the Federal Reserve or confirm certain candidates for cabinet posts.

Trump will have fewer constraints when it comes to executive action.

Presidents have considerable latitude in foreign policy, trade, and regulation. Increased tariffs on Chinese goods are the closest thing to a certainty in a Trump administration, though there is debate about whether the threat of 60% tariffs is real or is an opening negotiating bid. Trump may not have the legal authority to impose 10% across-the-board tariffs as discussed in his campaign, but it is likely that he will impose a series of country-specific tariffs. Based on the results of the first Trump presidency and assuming tariff initiatives fall short of campaign rhetoric, tariffs may create somewhat higher consumer prices, higher import prices, and some dampening of economic activity. Immigration is another area in which presidential authority is relatively less constrained. Trump is likely to halt Biden administration asylum programs and take executive actions to suspend certain types of immigration. Wage and inflation pressures may rise depending on the nature and magnitude of actions taken to curb legal and illegal immigration.

Domestic energy producers and banks are likely to benefit from a second Trump administration.

A second Trump administration is likely to be more friendly to domestic oil and gas production than a Harris administration, with more support for LNG exports, fewer regulations, and less support for EVs. However, with US production at all-time highs, it may be difficult for domestic production to rise materially in the near-term. Banks should benefit from the lighter regulatory touch expected under Trump, which is likely to reduce compliance-related costs and boost merger and acquisition activity.

EV subsidies are likely to be curtailed, but the age of electrification is likely here to stay.

EV adoption has already slowed and reduced incentives will be an additional headwind for EV manufacturers. In contrast, companies building out the grid have exciting long-term prospects, and there are opportunities among companies helping with climate change adaption. There is elevated risk for multinational companies with substantial revenues from China as well as companies relying on China-based supply chains and resources. China is the dominant producer of rare earth materials used in electronics and pharmaceutical ingredients, one of many potential areas of vulnerability for the US economy in a trade war. Companies relying on Chinese consumers or supply chains may face higher costs from tariffs or lower revenues if Chinese consumers choose to favor non-US brands. US education and tourism are also vulnerable to a trade war between the US and China.

Although the Fed is cutting rates, long-term rates may be stickier.

Long-term rates rose in the latter stages of the campaign and in the aftermath of the election. Most of the commentary around rising long-term rates points to government debt and the budget deficit as the cause. Although we believe that debt and deficits matter, we have a different point of view about what caused recent moves in bond yields. The dollar remains the world’s reserve currency and America can borrow in its own currency. In our view, this makes it less likely that the government will reach the tipping point in the next few years.

We expect yields to trend higher and for there to be a higher spread between short- and long-term rates. This story is driven more by the greater likelihood of negative supply shocks, with climate and policy-related supply shocks creating more investment uncertainty that drives up the need for a “term premium.”

Closing Thoughts

Elections influence the direction of markets, but investors should resist the impulse to make major changes solely in response to election results. Successful investors consider elections alongside a wide variety of factors that influence markets while staying focused on maintaining a sound long-term asset allocation and investment strategy.

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Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal.

This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct.

Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com