What a Trump win could mean for investors
In what was possibly the most covered election in history, the 2024 US election concluded with a decisive victory for Donald Trump. Trump’s win, securing both the popular vote and the electoral college, signals a renewed focus on a conservative economic agenda centred on tax cuts, deregulation, and a strong stance on trade.
Although Republicans are expected to hold a majority in the Senate and the house, their control remains narrow, but it does give Trump the means to enact his legislative agenda.
Markets have initially responded with optimism, likely in anticipation of tax reductions and pro-business deregulation. However, investors should remain mindful of the longer-term challenges posed by tariffs, immigration restrictions, and potential geopolitical tensions, which could drive inflationary pressures and disrupt trade.
Key 2024 US election takeaways for investors
- Tax Cuts: Boosts corporate earnings but may lead to higher deficits and bond yields.
- Trade: Protectionist tariffs could raise consumer prices and impact global supply chains.
- Deregulation: Supports business profitability but may challenge ESG standards.
- Fiscal and Inflationary Impact: Short-term stimulus may drive inflation and borrowing costs higher.
- Federal Reserve: Potential executive influence on rate-setting could impact interest rates and currency stability.
Detailed policy areas and their market implications
With Trump’s agenda re-emerging, certain policy areas stand out as particularly impactful for the broader economic and investment environment. Here are some of the proposed policies and their expected effects:
1. Tax policy and corporate earnings
Trump’s proposed tax cuts are aimed at reducing the tax burden on corporations and individuals, which could bolster economic growth by increasing after-tax income and incentivising business investment. These cuts would be positive for corporate earnings (profits), likely boosting market sentiment.
Substantial tax reductions also come with a cost: increased budget deficits. If the US government increases borrowing to cover the gap from reduced tax revenues, this may lead to upward pressure on interest rates over time, impacting both the cost of capital for businesses and broader economic growth. Long-term bond yields have already increased, signalling that markets are acknowledging this risk is real.
2. Trade and tariff policies
Trade remains a central pillar of Trump’s economic approach, with an emphasis on tariffs and trade barriers designed to protect US industries and companies. Higher tariffs, especially on imports from China, could disrupt global supply chains and increase costs for importers, contributing to inflationary pressures domestically and potentially affecting other economies, such as ours.
These trade policies may lead to higher consumer prices, impacting disposable income and potentially slowing demand in the economy. For investors, the trajectory of these tariffs is crucial, as prolonged trade tensions could weigh on global economic stability and alter long-term growth patterns.
3. Regulatory environment and business conditions
The Trump administration is expected to pursue deregulation across several areas, reducing compliance costs for businesses and potentially spurring domestic investment. A more permissive regulatory environment can enhance business profitability and foster expansion, especially for industries impacted by federal regulatory burdens.
However, deregulation also raises concerns about environmental, social, and governance (ESG) standards, as well as long-term economic sustainability. Investors may need to weigh the short-term growth benefits of reduced regulation against potential long-term risks, particularly in sectors where regulations have provided environmental or consumer protections.
4. Fiscal policy and inflation dynamics
Expansionary fiscal policies, including potential spending programs combined with lower tax revenue, will likely lead to higher deficits and increased borrowing. This fiscal approach can stimulate economic activity in the short term but may drive inflation higher, especially if combined with demographic shifts and tighter jobs supply due to restrictive immigration policies.
The bond market will likely feel the pressure from these inflationary forces, with potential increases in bond yields and borrowing costs. Investors should be cautious of the feedback loop where rising bond yields impact the overall cost of capital and weigh on share valuations, particularly if inflation remains persistently high.
5. Monetary policy and federal reserve independence
While monetary policy is primarily the domain of the Federal Reserve, Trump has expressed interest in influencing rate-setting decisions to support economic growth. If policies from the executive branch start to influence or constrain the Fed’s independence, this could alter market expectations around interest rates and currency stability.
Such shifts may lead to increased volatility in fixed-income markets and impact the USD, creating potential knock-on effects for inflation, foreign investment, and international trade. Investors may need to keep an eye on any changes in the Fed’s independence as it could have broad implications for both domestic and global markets.
Portfolio positioning and strategic considerations
Navigating these evolving policy dynamics calls for a balanced approach to portfolio management. With Trump’s inauguration set for January, investors have time to observe policy shifts as they materialise. Key strategies include:
- Maintain Diversification: Given the potential for both inflationary pressures and volatility in bond markets, maintaining a diversified portfolio across asset classes remains a sound approach. Allocating across shares, fixed income, and real assets can help mitigate the risks associated with unexpected policy impacts.
- Monitor Policy Developments: Staying attuned to policy announcements, particularly in tax, trade, and fiscal areas, will be essential for timely adjustments to portfolio strategy where required.
- Prepare for Inflationary Pressure: With increased deficits and potential tariffs driving inflation, positioning with some inflation-hedged assets could be beneficial.
Adapting to a dynamic policy landscape
Trump’s return to office brings a policy mix that, if implemented fully, could drive economic growth in the near term but may introduce inflationary and fiscal challenges over the longer term. By focusing on diversification and closely monitoring policy shifts, investors can better position themselves to manage risks and capture opportunities in this dynamic landscape.
The FMD Investment Committee (IC) will monitor developments and ensure client portfolios are well managed for any risks and opportunities that emerge as the President-Elect begins the next era for US politics.
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977. Rev Invest Pty Ltd is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977.