Events are happening fast following the election. No matter who you voted for, there is a new set of cards on the table, to use a poker expression. What follows are some first impressions and the assembly of a “base case” of expectations.
The phrase above that we sometimes utter to ourselves is spot on for President-elect Donald Trump. From top to bottom, if you look at who he will be working with and what he now knows, he is actually prepared to run the country this time. It’s likely that he will hit the ground running.
Conversely, we have the advantage of having watched him in operation in his prior four years. So, a couple of points to consider. First is that he tends to keep his campaign promises – at least a high percentage of them. Second is that he believes in dominating the news cycle. The third is that he likes people with strong opinions around him. Fourth, we have seen his use of tariffs in action. Fifth, and most important, he is simply focused on making the US the strongest economy…which includes reducing the risks to our economy.
A lot of the efforts started by Trump in his first administration will be continued. Yes, the Biden administration extended most of them, and yes, the world has changed during the Biden years. In the realm of foreign policy, look for achieving a hard-nosed understanding with China on trade and technology. Look for achieving a hard-nosed understanding with NATO about their own self-defense and Ukraine. Look for achieving a hard-nosed understanding with Mexico about border security, and hosting manufacturing from non-USMCA countries. Look for a concerted effort to get back on the track that achieved the Abraham Accords and the path that was headed. All this will be done with the same tone: Trump’s style is called power diplomacy.
A tremendous rally has occurred in the US stock market, and many sectors now trade at full valuation levels. Eliminating the political uncertainty is one factor. The now likelihood of lower tax rates is another. Repeated mentions of reducing regulations are a third. And the fact that the economy is growing at a decent pace provides a solid outlook for profits. But the economy is not in a sustainable position - more on that next. At this point, significant fiscal policy changes are a lot of conjecture, and the market is buying the perceived trend (and AI sentiment) versus any specifics.
President-elect Trump inherits a number of significant economic problems. The biggest is the primary budget deficit of the US Government. Spending more than is taken in via tax revenues can drive economic activity for a while, but our accumulated debt is now about equal to the value of our annual economic output. And we are running historically huge deficits while the economy is fine. (Typically, huge deficits are incurred “counter-cyclically” during a recession.) There is a force out there that at some point says, “no more” which is the bond market. And if the bond market won’t buy the debt, it’s game over. It’s maybe cold comfort to know that other large economies are closer to that edge than we are, but we must address this issue at some point.
The problem is, reducing the deficit reduces (purchased) economic activity. There are a number of policy ideas that can possibly “cheat” that equation, but these usually take time to work through the economy. A near term risk is the political consideration that if significant “medicine” is needed, it will likely come in the next year in order not to harm mid-term election prospects. A minimum target is to achieve economic growth faster (on average) than the growth of the amount of the accumulated US debt. Honestly, I am hoping to see some combination of fiscal changes to work in this direction in the next few months.
A word or two about tariffs. First, they are being “framed” as a revenue source to pay for any new tax cuts. We’ll see on that. Second, we saw them in use during the previous Trump administration amidst a lot of handwringing. And a couple of colossal failures. Long story made short; Trump likes unilateral deals. Tariffs are the lead, then negotiate back from there. Some tariffs are punitive and headline grabbing. Some get reduced. Some get eliminated by compensating actions such as import quotas, market opening actions or the elimination of the other country’s tariffs. Case by case, the art of the deal.
Finally, a word or two about deportations. Let’s bookend the immigration issue: we do need to control our borders, and we do need immigration – it helps our economy and helps Social Security. What happened in the last four years was basically uncontrolled immigration, with a fair number of known violent criminals allowed through. Percentagewise? Tiny, but still amounting to a fairly large absolute number of people. Trump will move to find and remove those individuals. As for the majority, I’m assuming they will be officially processed and stay, for the good reasons stated above. And yes, the border wall will be built.
There are less than 55 days between the election and the inauguration. It does appear that the rather unique peaceful transfer of power we have in this country will once again prevail. That’s a relief, as is the absence of post-election violence that was predicted by some. Thank you, Joe Biden and Kamala Harris, for setting the tone on this.
What are the broad-brushed investment implications? With the current fiscal and monetary policy regime, some very good corporate profits will be made in 2025. Interest rates being “higher for longer” will continue to be part of the mix. But stocks in general are expensive right now. Investor sentiment is very high.
Our new President “hitting the ground running” means significant policy changes are coming. Trump plays hardball and he is going to threaten a lot of entrenched “institutions”. This is not his first rodeo, hopefully he learned a few hard lessons about effecting change from his previous four years. But…he also knows he is a one term President and to give more motivation, he’s been shot at. Another motivation to the “moving fast” thesis” is the economy has to be on a recovery path by the midterm elections – or his political advantage could flip. All of this implies rising uncertainty, but we do have to wait and see what the actual game plan will be. Trump’s transition team has been in place for months and personnel decisions are moving fast.
You can gather from the totality of my comments that the risk “tilt” is toward lower stock markets sometime in the next six months. But making decisions in an atmosphere of conjecture is guessing – which likely lasts through year-end and into late January. We need to know the key policy fights and in what sequence. Our assumption is the overall intent is to make our economy “the best place in the world to do business”. But there just isn’t enough solid information right now. So, we are simply selling individual stocks that haven’t “worked” or aren’t participating in this rally and gathering cash. Stay tuned.
As always, if you have questions, comments or concerns, do not hesitate to give me a call at 248 561 4597 or email at This email address is being protected from spambots. You need JavaScript enabled to view it.