2024 Post-Election Economic Outlook

Key Points

• The new administration inherits a strong economy that has continued to grow despite persistent forecasts of impending recession over the last few years. This consistent growth has kept labor markets strong and has persevered despite the restrictive monetary policy needed to quell inflation.
• The election result is likely to produce major policy changes. These may include an extension of some or all of the Tax Cuts and Jobs Act (currently set to sunset in 2025), a more protectionist, tariff-heavy trade policy, increased incentives for domestic energy production, and a lighter regulatory burden on a wide range of businesses. If Democrats can win a majority of seats in the House of Representatives, the path forward for Republicans to make some of these changes will be more challenging.
• Tighter immigration policy may put stresses on a labor market that is already at full employment. Should the labor market tighten meaningfully, it may result in upward pressure on wages resulting in wage-push inflationary pressures.
• In the short term, the impact of these potential policy changes is unlikely to affect monetary policy. However, some of the new administration’s policy proposals may have impacts that add to inflationary pressures, potentially resulting in higher interest rates in the future.
• While we have a reasonably good idea of the new administration’s policy priorities, we do not know exactly what will be implemented or what their impacts will be. As such, it may be imprudent to make significant changes to investment portfolios based solely on the results of the election.

The Election Is Over, Now the Hard Part Begins

The 2024 election is now in the books except for the final count for a handful of races in the House of Representative. Those results will determine if Republicans have completed a sweep or if we will have a divided Congress for the next two years. The new administration inherits a strong economy that has continued to grow despite a near constant chorus of prognosticators predicting recession. Moderate but consistent growth has kept labor markets strong and has continued to persist despite the restrictive monetary policy needed to quell inflation.

Much ink will be spilled speculating on the specific policy changes that will emerge from the new administration. However, at this point in time, it is only that – speculation. The exact nature of the policies to be enacted will be heavily dependent on the makeup of Congress. Once the new administration and Congress are in place, it will take time for specific policies to be implemented. And even when that has happened, the impact of these policies will not be immediately clear.

However, there are several policy proposals that have been consistent talking points during the runup to the election, and we should expect that they will remain priorities for the new administration.

• Tax Policy - There will likely be a strong push to extend the Tax Cuts and Jobs Act from President Trump’s first term in office, which are set to sunset in 2025. In addition, there has been some talk of lowering the corporate tax rate to 15% and providing various other tax cuts – exempting Social Security payments and tips from income taxes are two such examples. The final bill will be in the hands of Congress, and should the Democrats control the House, Republicans would need a 60% majority in the Senate to pass tax legislation. This would require bipartisan support, which would almost certainly result in concessions being made to Democrats.
• Trade Policy - President Trump campaigned on a promise to enact a broad-based tariff regime. Implementation of tariffs of 10% or more would function as a de facto sales tax on U.S. consumers, who will bear the costs on imported goods and services. It is possible that the threat of tariffs will be used as a negotiating tactic to secure more favorable trade agreements. One risk of adding broad-based tariffs is that they invite retaliation from our trading partners, making U.S. exports less competitive. In addition, restrictions on imports could create supply chain disruptions, which may put upward pressure on inflation.
• Regulation – Banks, energy companies, large tech companies, and companies that may be involved in M&A activities are expected to be beneficiaries of a lighter regulatory environment under a Trump administration. While it is widely accepted that the Trump administration will pursue a more relaxed regulatory regime than the Biden administration, it is not clear exactly what that will entail. It is difficult to remove regulations from the law, as the deregulation process is, in most instances, similar to the process of adding new regulations, which include a notice and comment process. According to the Institute of Policy Integrity at the NYU School of Law, the first Trump administration attempted to overturn 246 regulations through litigation, and they were successful in only 54 of those cases. While removing regulations is difficult, it is far easier to decline to make any new regulations or to decline to take enforcement actions, so this would seem the most likely path forward over the next four years.
• Immigration – Immigration reform was a key issue in this election and there will be significant pressure on the new administration and incoming Congress to take action on this campaign promise. This could include increased funding for border security and tighter rules surrounding asylum applications. An overly restrictive immigration policy could backfire as the labor market has become dependent on foreign workers. Should immigration reforms become too restrictive, labor markets could tighten, causing wages to rise as jobs become more difficult to fill. These higher wages could ultimately result in upward pressure on inflation, making it difficult for the Federal Reserve to continue to lower interest rates.
• Fiscal Deficits – Despite inheriting a strong economy, President Trump will also inherit a large and growing federal deficit. The Office of Management and Budget projects that total federal debt will be 124% of GDP at year-end 2024 and will rise to 128% in 2029. There were no indications from either candidate in this election that the fiscal deficit was a priority, and it is probably a safe assumption that the nation’s debt will continue to grow.

Equity Market Impacts

The stock market rallied sharply in the immediate aftermath of the election. Some of this rally can be attributed to the belief that the incoming administration will implement market-friendly policies, such as a lighter regulatory regime and tax cuts, while some part of the rally may be a reaction to the reduction in uncertainty that all election results bring. To the former point, equity markets do not seem to be fully discounting the risks associated with more restrictive trade policies, including tariffs, and rising fiscal deficits.

Some areas of the market that might be expected to be impacted the most may include:

• Energy Stocks. Energy stocks may respond favorably to the prospects of lighter regulation. Energy stocks have done well over the last several years and increased domestic energy production may result in lower prices for consumers, which would be a positive for inflation, but may offset some of the benefit accruing to energy stocks from lighter regulation.
• Small Cap Stocks. The costs associated with high levels of regulation are more difficult for smaller companies than their larger competitors. However, smaller companies may be more negatively impacted by rising wage pressures resulting from immigration reform.
• Big Tech Stocks. It is widely expected that big tech companies will face a lighter regulatory environment under a Trump administration, including less scrutiny by the FTC around M&A activity as Trump is likely to replace Lina Kahn, the head of the FTC.
• International Stocks. International stocks may face headwinds if the dollar strengthens and trade policy becomes more restrictive. However, U.S. policy changes may be met with corresponding policy changes by other countries, including retaliatory tariffs and economic stimulus packages, which could offset some or all of the effects caused by U.S. policy.

Bond Market Impacts

Elevated fiscal deficits and the potential for higher interest rates could have a negative impact on bond prices. In the runup to the election, treasury rates backed up with the 10-year U.S. Treasury yield going from 3.63% to 4.42% between September 16 and November 6. There is an argument to be made that the rise in interest rates is due to anticipation of stronger economic growth. However, the fear of increased Treasury issuance required to fund rising budget deficits may well be driving at least some of the increases in longer-term interest rates. While higher yields are good for bond investors in the long run, rising rates create short-term mark-to-market losses and increased price volatility for bond holders. However, the pro-growth policies being proposed could have a positive impact on credit risk, resulting in lower default risk for corporate credit.

Conclusion

While investors often want to make changes to their portfolio positioning based on election results, over the long-term, financial market returns tend to be determined by factors such as corporate earnings, economic growth, interest rates, and inflation. Predicting which investments will perform best based on expected policy decisions can prove to be maddeningly difficult.

To provide one example, to this point in President Biden’s term, the S&P 500 has returned 57.4%. It may be surprising that the best performing sector during that time was energy, which is up 136.4%. Betting on energy stocks to be the best performing sector in January 2021 would have been a difficult call based on the Biden administration’s anticipated policy of a tighter regulatory regime for oil and gas companies and incentives for renewable energy. Investors who bet against energy stocks over the last four years missed out on the best-performing sector of the stock market.

It is easy to fall into the trap of viewing election outcomes as having direct binary impacts on financial markets. The reality is more nuanced, and forecasting these impacts is difficult, if not impossible to do with a reasonable degree of confidence.

A prudent approach seems to be one that allows for preparation for a wide range of outcomes. This might involve revisiting your investment plan to ensure that you are still on track to meet your financial goals and determine if any changes need to be made given your circumstances and time horizon. This can be a good reality check, especially if the time horizon of your investment portfolio exceeds that of a four-year presidential term.

Some policy decisions, such as changes to the tax code, may result in changes in the timing of certain decisions, such as when to realize capital gains, make gifting decisions, or make charitable contributions. Monitoring your long-term plan and making prudent adjustments may not seem satisfying in the present, but that is the necessary work required to maintain good financial hygiene and stay on track to meet your long-term goals and objectives. Policy uncertainty, and the impacts of the policies that are ultimately enacted, is a risk factor that investors must deal with following elections. And portfolio diversification can be a first line defense against these unknown risks.

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