To start, the message from both financial markets and the public was clear. As we note repeatedly, financial markets have no emotion. They care about earnings, interest rates and the terminal value of a stream of future cash flows. They don’t care about all the emotional stuff we have been dealing with over the past many months. Americans at the core are centrists, perhaps a little to the right of center when it comes to money, and a little left of center regarding social issues. Whenever one party or the other deviates too far in one direction, that party loses. Not sometimes, but all the time. Trump’s chaotic behavior probably prevented a more decisive win. But in the end, Americans voted as they almost always do, with their wallets and they liked the Republican message better. We saw this in not just the Presidential race but down ballot as well. While all the final tallies are not in yet, it appears Republicans will have workable majorities in both the Senate and House for at least the next two years.
The obvious reactions have already played out. Fewer restrictions on energy production. A boost of support for crypto currencies. Less regulation. More freedom for M&A activity. Low taxes.
But not everything is clear cut. 10-year Treasury yields this morning are over 4.4%. They were close to 3.5% in September. When Trump was last President, the economic picture was one of slow but steady recovery from the Great Recession. Stimulative economic policies did not cause an inflation spike due to plenty of excess capacity. The Fed Funds rate was near zero. Today, it stands at 4.75% and the Prime rate hovers near 8%. Less regulation going forward might be good. More stimulation and higher deficits might be a problem.
On the campaign trail, Trump made lots of promises like tax-free social security benefits, overtime pay, and tip wages. He was even contemplating doing away with income taxes entirely, replacing the lost revenues with tariffs and a value-added tax (VAT). How far these ideas get winding their way through Congress is clearly uncertain. While Republicans may appear unified in supporting Trump’s agenda, most are fiscally conservative and don’t want to risk the impact of deficits exploding well past $2 trillion. Tax policy changes have to be scored by the Congressional Budget Office. That’s why so many tax changes in the past have had sunset provisions. That includes Trump’s previous set of tax cuts executed in 2017 but set to expire at the end of 2025. Might tax-free Social Security benefits make the cut, for instance? Perhaps if they are means tested, as an example. What about tip wages or overtime pay? Those will be harder to define. Trump won’t have to win on all his promises, just some.
Let me now move to sectors for a closer look.
Energy: Trump and his supporters don’t argue that the planet is getting warmer. They argue over the costs and benefits of efforts over the past several years to solve the problem. Americans are not excited about the EVs offered today. Yes, as a percentage of automobiles sold, they are rising slowly, but nowhere near the pace advocates had previously suggested. Trump isn’t against EVs; he’s against forcing Americans to buy what they don’t want. Getting out of the way and letting the private sector build a better car that Americans want to own is a better solution, at least in the eyes of the incoming administration. Thus, expect green energy mandates to be reduced, as an example of policy shifts.
In addition, Trump believes energy independence gives him a political advantage on the world stage. The oil industry has learned that maximizing production isn’t the best path to maximizing profits. If more production means lower oil prices, energy producers will shift production to regions that offer lower costs. Exxon’s acquisition of Pioneer last year allows it to drill up to 4 miles horizontally from one well head driving down the cost to produce a barrel of oil. Lower prices and lower costs can be a win-win for all.
Healthcare: Repealing the Affordable Care Act is no longer a likely possibility. As Republicans learned in Trump’s first term, repealing without a replacement isn’t viable. But that doesn’t mean ACA is a protected sacred cow. Far from it. Trump has pledged not to disturb Social Security or Medicare. But Medicare costs keep rising. If he is going to retain the benefits, he has to put pressure on providers to reduce costs. Technology and innovation will work to his advantage. The GLP-1 drugs can help drive down the costs of care, for instance. Pressure on drug prices, or the roles of pharmacy benefit managers will continue.
Technology: The Biden administration’s pressure against M&A deals had its merits, in some cases. But unintended consequences choked private equity and venture capital markets by limiting exit strategies materially. While VP-elect Vance was supportive of some of Lina Khan’s actions, it is highly unlikely she will stay as head of the FTC. No industry flourishes more than technology if entrepreneurial juices are allowed to flow freely. Too much freedom can be dangerous. You don’t want to let giant companies squash competition unfairly. But regulatory restraint will be good.
The risks for technology companies will be Trump’s approach to China. He has already promised a huge bump in tariffs. The Biden administration sharply curtailed exports of American products with the most advanced technology. How will Trump change that? He views himself as the ultimate dealmaker. He will be dealing with a Chinese leader seeking to consolidate power against a backdrop of a slowing economy and declining population. Growth in China today is less than 5%. It was about 7% the last time Trump was in office. The relationship between the two leaders will be a key factor over the next two years. If Xi wants to play tough or dirty, Trump will have the tools to counter. If there is warmth between the two, maybe better economics would benefit both.
Banks: Less regulation and an ascending yield curve logically should be helpful to banks. Investment banks will benefit from enhanced deal flows. But there is a fly in the ointment here. If too much stimulus starts to reignite inflation, all the assets on bank balance sheets will be worth less. Forget the accounting rules whether those assets are to be held to maturity or not. The value of a fixed-rate loan, whether it be for two years or twenty years goes down as interest rates go up. Higher rates also impact the credit worthiness of banking clients. There is a tremendous amount of debt on bank balance sheets and on government balance sheets that will have to be refinanced over the next two years. Almost certainly that will be done at a higher cost to borrowers. Trump may try to jawbone the Fed to lower rates faster than might otherwise happen. But markets will react negatively if they don’t agree with his posturing. He can pressure people but he can’t pressure markets.
Deregulation: When Elon Musk acquired Twitter and changed it to X, he literally cut the staff in half virtually overnight. While it will be unlikely that Musk will take a cabinet-level role within the government and walk away from managing Tesla, SpaceX, etc., he will have Trump’s ear. With that said, cutting headcount at a private business and doing so in government are different. Government processes require all sorts of public comment periods and reviews. With that said, there are trillions that can be saved. A truly serious effort to rationalize government spending can save hundreds of billions of dollars. With that said, politicians are great about suggesting expenses cuts; they aren’t so good about doing it. Cutting expenses means cutting people. That doesn’t win a lot of votes.
Immigration: Without entering the debate about who or how many should be let in, and recognizing the hyperbole of deporting 20 million non-citizens, what is probably logical is that access across our Southern border will be severely curtailed (within the boundary of present laws). Total immigration numbers (legal and illegal) are likely to fall, perhaps significantly. Combined with a declining birthrate in the United State, that means slower population growth. To maintain GDP growth, that will require greater productivity. We also are living in a country without a lot of excess labor today. Unemployment is 4.1%. It was 4.6% when Trump last took office. If Americans are going to fill the jobs of deported immigrants, won’t labor costs be higher? If you haven’t noticed, labor has been winning some big deals lately. Look at Boeing, the auto industry, screen writers and actors, or UPS. A port strike was deferred until January 20, 2025, the day of inauguration. It could be Trump’s first test.
CONCLUSION: Overall, a Trump win sounds good economically. Markets are reacting as such and the will of the American people clearly favored his economic agenda. While he is more a populist than a traditional Republican conservative, Trump clearly believes that where possible capitalism and private enterprise are better allocators of capital than the Federal government. But there are risks. Trump the entrepreneur, was able to use bankruptcy laws to his advantage. He can’t simply default on government debt. The size of debt and deficits never matter until they matter. Expanding debt service costs will pressure defense spending and entitlements (think Medicare). Banks may have freedom to make more loans but take more risks doing so in a rising interest rate environment. Why has Warren Buffett been selling Bank of America lately?
In the short-run, expect an explosion of optimism. But the devil is always in the details. If there is one economic data point to watch over the next 6-12 months, it will be the yield on 10-year Treasuries. As noted earlier, it is 4.4% today versus 3.5% in September right around the time of the debate Trump “lost” to Harris. Can it run much further without jeopardizing the strong advance in equity prices? Financial assets compete for investor dollars. Stock prices can’t go up while bond prices are going down forever. Soon the short-term euphoria will wear off. For some companies and industries, the boom might continue. Others will face conflicting realities. Over the next couple of months, as Trump releases details of his early agenda and announces his planned leadership team, markets will react.
One final point. The results last night were decisive enough such that voters and not the courts were able to determine the outcome. For those upset about the turn of events, take of deep breath. Life will go on. Hug your spouse, your children, and your friends. Daily life tomorrow won’t be much different than it was yesterday. Democracy worked. Americans got to choose in a free and fair election. Congress will have a lot to do. When Trump last took office, he also had majorities in both chambers of Congress. The 2017 tax reduction act was his signature moment. But by 2018’s mid-terms the mood changed. Congress should be mindful of that. Hopefully, the acrid air of the campaign that start to give way to a better environment going forward. At least that is what voters last night suggested they want.
James M. Meyer, CFA 610-260-2220