At the time of writing this piece the most likely outcome of the US election is a “red sweep”. Donald Trump has already won the Presidential election and control of the Senate and is on the verge of clinching the House of Representatives. On the basis that this is confirmed, Trump will have a red sweep, meaning fewer checks and balances – which could potentially frustrate the implementation of his policy agenda.
Trump’s key policies concern tax cuts, deregulation, border control and tariffs on imported goods (particularly from China). We feel that the first two are a positive backdrop for equity markets given their impact on corporate earnings delivery and business sentiment more broadly, and this is certainly how financial markets have responded so far.
As markets typically react positively to decisive election wins, Trump’s likely red sweep is the most positive scenario for risk assets going into the end of 2024. Meanwhile, the US Federal Reserve continues to stay the course, reducing its key interest rate by 0.25% at last week’s policy meeting, building on the 0.5% reduction at the previous meeting in September.
There have been concerns that the Fed could spoil Trump’s victory party by taking the monetary policy punchbowl away before things have got started. We don’t think that is very likely and it seems to me that the Fed is currently on a predetermined path towards a neutral Fed Funds rate, which implies four quarterly rate cuts of 0.25% during 2025. This policy stance aligned with reflationary fiscal policy should remain a positive backdrop for equities until well into 2025.
However, we do feel that the impact of Trump’s policies on immigration and trade could be somewhat more mixed. Much stricter border controls and the mass deportation of illegal immigrants - whilst electorally relatively popular - is likely to reduce the labour supply and could push up inflation as the labour market tightens.
Turning to tariffs, Trump is rightly concerned about the negative impact of cheap imports - particularly from China - on domestic US industries; and he is particularly keen to act where state subsidies have been involved. However, tariffs will be paid by US businesses who rely on imported goods, and if there are insufficient substitutes available, some or all of this cost will be subsequently passed on to US consumers via higher prices.
Moreover, there is also a risk that if Trump follows through with his threats of across-the-board tariffs of 10-20% (and 60% on Chinese imports) we could see a tit for tat trade war, which pushes up prices, reduces competition and innovation and weakens economic growth. However, this is a longer-term issue for the markets to focus on and we still don’t know whether Trump will use tariffs as bargaining chips to try to extract concessions from the US’s trading partners.
Elsewhere, and as we head through 2025, there will be more focus on the sustainability of US public finances. The current ratio of publicly held US debt to GDP is 97%, and this is forecast by the Congressional Budget Office to rise to 122% by 2034. However - and this is an uncertain forecast - if we include the effects of Trump’s full range of policies, this figure could rise as high as 145% GDP in ten years’ time. If borrowing were to reach this sort of level, the ability of the Federal Reserve to set monetary policy without having an eye on its impact on fiscal sustainability could be restricted (this is known as fiscal dominance). This is why Fed policy - which guides the market to expect lower interest rates - matters so much to investors.
Whilst it is often tempting to view financial markets through the worrisome lens of geopolitical uncertainty, it is far more fruitful to focus on the evolving outlook for growth, inflation, corporate profits and central bank policy stance. In the round, these are supportive for stock markets. We therefore expect the positive tone to persist going well into the New Year. However, and as we head through 2025, there will be undoubted risks posed by labour supply, trade policy and the fiscal deficit which are likely to cause periodic bouts of volatility.
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
