Obviously, the place to start is the consequences of the Presidential election. One can look at the election in two ways. Trump won and Biden/Harris lost. Let me start with the latter. Throughout the campaign the biggest criticism of Joe Biden was that he was getting too old to serve another four years. But much of the decline in Biden’s popularity over the past couple of years had less to do with his age and stamina and more to do with the unpopularity of his policies. Americans didn’t like the burden of inflation. How much was the result of his policies and how much was beyond his control isn’t all that important. The other major issue was the flood of migrants crossing our southern border. Biden didn’t take steps to slow the flow until this past summer, too late to register with voters. There were other factors as well. The giveaways (e.g. student loan forgiveness) and some of his administration’s woke policies didn’t endear him to the majority of voters. Finally, there were the insidious economic costs of a record number of new regulations.
Thus, just as a vote for Biden is 2020 was viewed by many as an anti-Trump vote, there were many this time around who chose Trump because they didn’t want four more years of Bidenomics! Everyone knew or should have known what they were getting with four more years of Trump. In the end, they said to themselves, they would rather accept the chaos a Trump administration would bring rather than four more years of Biden policies. Kamala Harris said explicitly to voters that she couldn’t think of anything she would do differently than Biden. Once she said that the election became a battle of Trump politics versus another four years marching to the political left.
All this explains the Biden/Harris loss. But the reaction of markets in November suggests that there is more to the rally than simply a relief that the Democrats lost and progressive policies are going to be discarded. What got markets excited was what lies ahead. To be sure, what lies ahead includes some chaos. Some of Trump’s cabinet nominees are suspect, although his economic team looks pretty solid. Less than a month since the election, Trump has already promised substantial tariffs against Canada, Mexico, China, Brazil, Russia, India and Iran unless they meet certain conditions. So far, these are threats. It’s the way Trump works. But markets have chosen to ignore the chaos to date and look forward with optimism. Let me list a few points of market optimism:
1. Keep taxes low. Trump would like to extend his 2017 tax cut provisions that sunset at the end of 2025 plus fulfill in some way his campaign promises to eliminate taxes on overtime pay, tips, and Social Security receipts. While that entire package can’t be done in the abstract without very short-term sunset provisions or some other modifications, clearly Trump wants to rearrange the tax code to benefit the investor class at the expense of lower-class Americans. The societal impact of such a change is beyond the scope of my comments. The economic consequences appear positive to investors.
2. Drill, baby, drill. Trump will sharply reduce restrictions that limit the abilities of oil companies to extract more oil or to export more LNG. But that doesn’t mean oil companies will maximize production. For many years now, investors have spoken emphatically to the oil industry that what they want is to maximize free cash flow, not barrels of production. Less regulation will lower the costs to produce and will enhance our abilities to export product, particularly liquified natural gas. But the benefits might prove more marginal that the headline slogan, “drill baby drill” suggests.
3. DOGE – The efforts of Musk/Ramaswamy are not unique. Al Gore undertook similar efforts during the Clinton administration to great effect. On the other hand, the Simpson/Bowles recommendations during the Bush years never made it to Congress. The DOGE effort this time around should/could result in significant savings. The hope here is that it is done carefully and surgically. While Musk famously fired about half of Twitter’s workforce as soon as he acquired the company, the Federal government and Twitter are very different. By Executive Order, many of Biden’s regulations can be quickly reversed. But mass firings are a pipe dream. Just as an example, look at the situation at Newark Airport this past holiday weekend when multiple ground stops were needed due to a lack of flight controllers. There are plenty of places to cut costs and save money within the Federal government. But realize that much of those savings are going to be people related. The fired workers live in someone’s Congressional district. Getting the cuts done will take some time. But as Gore and Clinton demonstrated three decades ago, it can be done. The bigger point is that Federal spending as a percentage of GDP rose to near record levels during the Biden years. That is going to be reversed. The cuts aren’t all people related. Medicaid/Medicare abuses are enormous. Loan forgiveness will end. Savings approaching $200 billion per year can be achieved. If done properly, government efficiency can increase. But too much too fast will be confrontational and, likely, counterproductive.
4. Deregulation. During the Biden administration about 3,700 new regulatory actions were commenced. And there are still six weeks to go! Of them, 287 have been deemed significant meaning they had meaningful economic consequences, almost all negative. Look for most to be reversed quickly.
5. Economic growth – Meanwhile the economy keeps humming along with GDP growth of 2.8% in the third quarter and further advances expected in the fourth quarter and beyond. While inflation’s path toward 2% is moderating, there are few signs it will reverse course soon. Obviously, tariffs are a worry. But the threats to date are just that, at least until they are implemented. The actual economic cost and the inflationary impact will likely be more modest than they appear at first blush. Indeed, expect imports from countries subject to future tariffs to increase over the next few months. That could accelerate Q4 GDP growth, but with some offset early next year. As for inflation, there are few signs yet that Trump policies will increase the pace. The negative impact of tariffs will likely be offset by efficiencies gained for deregulation. While the timing of the plusses and minuses will differ, and therefore create some short-term distortion in the data, the longer-term trend is what’s important.
I have listed factors under some control of the White House and Congress. Some steps can be taken quickly. Those requiring legislation will take much longer. The Trump team has perhaps 18 months to get as much accomplished as possible. It appears the House majority for Republicans will be smaller than last session when they could get nothing done. It may not be the renegades on the right (minus Gaetz) who cause the problem this time around, but getting all approximately 220 Republicans on board for anything will be an achievement. The keystone for Congress will be the tax bill. Done right, only a majority will be needed in both the House and Senate. But getting the right balance won’t be easy. One shouldn’t expect a final resolution until late this year.
Beyond Trump policies, world economies will continue to benefit from improvements in productivity. Gains from AI are just beginning. Look for productivity over the next four years to increase. The offset will be a meaningful decline in population growth both due to declining birth rates, less immigration, and increased deportations. Again, the actual number of deportees is an open question and the process will take some time. Even under Trump, you can’t gather up a million migrants, put them on planes and simply dump them in Mexico. It will be a process. Sealing the southern border will be an easier first step.
On balance, markets see solid growth, increased economic efficiencies, and low inflation. As events unfold that view might change. But for now, that’s the vision until altered by future facts. No reason not to expect the rally to continue until year end.
Today Britney Spears is 43. Actress Lucy Liu turns 56.
James M. Meyer, CFA 610-260-2220