The US Election Outcome: Impacts on Financial Markets and Investment Portfolios
The results of the US election are in: Donald Trump has won the presidency, and the Republican Party has secured the Senate. While the House of Representatives’ final outcome remains uncertain, at the time of writing it leans toward Republican control, signaling a potential “Red Wave” for the incoming administration.
Regardless of the election outcome, significant changes to fiscal and regulatory policies were anticipated. Now, with a Republican-controlled government, the ability to enact sweeping changes appears far more feasible. Below is an analysis of what this could mean for the economy, markets, and your investment portfolio.
Key Policy Changes Under a Trump Administration
1. Fiscal Policy and Congressional Approval
With Republican dominance in Congress, President Trump will likely face fewer hurdles in implementing his fiscal agenda. Key components include:
- Extending Tax Cuts: The 2017 tax cuts, set to expire in 2025, are expected to be prolonged.
- Wider Fiscal Deficits: Broader tax cuts may increase deficits, partially offset by revenue from tariffs.
- Spending Cuts: While cuts have been suggested, significant reductions are politically challenging and less likely.
Fiscal deficits, already substantial, could widen further. The potential for higher GDP growth from AI advancements could modestly increase tax revenues (and help offset this widening deficit).
2. Regulatory Changes
Trump has vowed to reduce regulations across sectors. A Republican Congress enhances the likelihood of deregulation, potentially boosting business confidence and investments.
3. Inflation Reduction Act (IRA)
Although Trump has expressed interest in repealing parts of the IRA, Republican states have benefited significantly from its provisions. As such, any changes to the IRA are expected to be minimal.
Policies Not Requiring Congressional Approval
1. Tariffs and Trade
The President of the United States has considerable authority to impose tariffs. While implementation involves a lengthy process, Trump may use tariff threats as leverage in negotiations. This strategy could lead to selective tariff application or withdrawal based on outcomes favorable to the administration.
2. Immigration Policy
Trump has pledged to slash immigration and deport millions of illegal migrants. Large-scale deportations are unlikely due to legal and logistical challenges. However, overall immigration rates are expected to decline, though perhaps not as drastically as political rhetoric suggests. Indications are that they had already started to decline during 2024.
3. Influence on Monetary Policy
Trump’s comments about influencing monetary policy raise questions about the Federal Reserve’s independence. However, any direct intervention is likely to be limited. His preference for a weaker US dollar may conflict with tariff policies, which could strengthen the dollar instead.
Implications for Economic Growth
The economic impact of Trump’s policies introduces significant uncertainties.
- Growth Drivers: Deregulation and fiscal spending could stimulate GDP growth.
- Crowding Out Risks: Larger deficits and higher yields may limit private-sector investments.
- Tariff Impacts: Tariffs are disruptive for businesses and may negatively affect US and global growth.
While tariffs aim to boost competitiveness, the strengthening dollar may offset any perceived advantages.
Implications for Inflation
Increased fiscal spending and tariffs could initially drive inflation higher. However, the Federal Reserve’s monetary policy response will be critical.
- Interest Rates: The Fed is likely to continue cutting interest rates, aiming to avoid appearing overly political.
- Inflation Expectations: If expectations remain anchored, inflation could eventually stabilize, even with temporary upward pressure.
Financial Market Reactions
1. Equities
The expectation of looser fiscal policies and deregulation has boosted equity markets.
- The S&P 500 has reached new highs, building on its strong year-to-date performance.
- Small-cap equities, a previous beneficiary of Trump’s policies, have outperformed.
- Emerging market equities have underperformed, reflecting concerns about potential trade disruptions.
2. Bonds
Higher fiscal deficits and growth expectations have triggered a sell-off in government bonds.
- The 10-year Treasury yield has risen to around 4.45%, from 3.61% in September.
- The yield curve has steepened, but inflation expectations remain stable.
3. Currency Markets
The US dollar has strengthened, supported by higher yields and anticipated tariffs.
- The trade-weighted dollar has rallied further, adding to recent gains.
- Tariff impacts could drive significant currency adjustments, particularly against the Chinese renminbi.
Risks and Opportunities
Tail Risks
The election results amplify both upside and downside risks for markets:
- Upside Risks: Tax cuts and deregulation could boost economic growth and corporate profitability.
- Downside Risks: Tariffs and potential trade wars may disrupt global trade and economic stability.
China and Emerging Markets
A Trump administration is bearish for Chinese exports to the US and inbound investments. However, China may counteract with fiscal policy easing and measures to stabilize its housing market.
For emerging markets outside China, tariff-related shifts in trade dynamics may create opportunities.
Portfolio Considerations
Given heightened uncertainties, a cautious approach is advisable:
- Maintain neutral equity exposure to balance potential gains and risks.
- Monitor the US dollar for further strengthening, particularly against currencies like the renminbi.
- Watch for bond market movements, as upward pressure on yields could create opportunities in certain fixed-income segments.
Investors should prepare for market volatility as policies evolve and global responses become clearer.
Navigating Uncertainty with Strategic Planning
The US election outcome underscores the complexity of global markets. While opportunities exist, so do significant risks.
The Continuum Financial Planners team is here to help you navigate these challenges with a strategy tailored to your unique goals. Together, we can assess your portfolio, adapt to changing market conditions, and position your investments for long-term success.
Let’s discuss how these changes might affect your portfolio and identify opportunities to protect and grow your wealth. Contact us to schedule an appointment –
- By phone, on 07-34213456, or at your convenience
- Using this Book A Meeting facility.
(Based on our research, and enhanced through ChatGPT, this article was first published in November 2024.)
