The overhang of the US election is now behind us and markets have taken a collective sigh of relief, not entirely because of the results, but because the uncertainty of who will be in office is now clear. The focus now turns to how the newly elected president will handle challenges in the current macro backdrop while attempting to build on the priorities from his first term, including tax cuts, tariffs, and deregulation. Let’s look at how these changes to the economic and regulatory landscape could impact the US economy and global markets.
The good news for President-Elect Trump is the economy he is inheriting appears to be in pretty good shape. GDP growth for the last two quarters has been above consensus at 3% and 2.8%, respectively, while inflation has drastically improved from the peaks of 2022. Real income for households continues growing strongly, US productivity growth is above trend, and the labor market remains tight with unemployment at 4.1%.
Proposed Shifts in Policy and How the Economy and Markets Could Be Impacted
Extension of the 2017 Tax Cuts and Jobs Act (Trump tax cuts) that was set to sunset at the end of 2025, is now highly likely, avoiding a huge nominal tax hike on individuals and businesses. The continuation of these lower tax rates along with additional tax cuts (if passed) discussed on the campaign trail, on items such as tips, overtime, and SSI, should help stimulate the US economy and investment activity.
A more protectionist trade environment is expected with the new administration, including potential tariffs being imposed on a wide range of goods. The question is how big? There are rumors of up to 60% on imports from China, 25% tariffs on automobiles coming from Europe, and even a 10-20% border tax on all goods coming to the US from abroad. In theory, this new source of revenue for the US government could help offset the costs of extending and potentially expanding tax cuts. While likely a tailwind for stocks, economists tend to agree that tariffs ultimately result in higher prices on everyday goods which are passed on to customers. We’ve heard estimates in the range of 30-40 basis points of inflation from tariffs and up to 100 basis points if we also get the 10-20% border tax.
Deregulation appears to be a key theme under Trump, particularly in areas such as energy, finance, transportation, and the environment. Trump is quoted as saying, “It’s going to be the largest regulatory reduction in the history of our country, and it’s going to happen very fast”. Elon Musk has been put in charge of a “government efficiency commission” tasked with cutting rules and ordering the government to eliminate at least 10 rules for every new one. Deregulation is widely seen as beneficial to the economy and markets because it lowers costs of operations, improves innovation, allows more businesses to enter a market, and lowers prices for consumers.
Challenges and Conclusion
One major hurdle this time around for the President-Elect in getting what he wants is that the current economic backdrop is far more challenging than what he faced 8 years ago. National debt levels, inflation, and interest rates are all significantly higher. The TCJA extension along with other proposed tax cuts would likely add another $7-$8 trillion to the national debt which already sits at $35 trillion. This level of debt along with deficits that are materially higher could create a ceiling for what could get passed, different from 2016. With that being said, fiscal policy under the new administration should still be slightly expansionary, just maybe not to the degree we saw under Trump’s first term.
