This has been a significant week in our country and in the world. There is much to be explored about the results of the 2024 election, in all areas of life. But my role for you is to answer the question that I’ve been asked several times. How does a second Trump presidency impact my investments?
The short answer is that I expect the short-term stock market returns to continue to be positive, but there are significant concerns in the near short-term. The economists that I follow and rely on agree with this, and we’ve already seen evidence of it in the past few days. I expect that we will see continued stock market growth for the next 9-12 months. But after that, there is significant cause for concern.
To explain further, Trump showed us in his previous administration what economic moves he will likely make, and this time he will have less guardrails to rein him in. We know that he is pro-corporation. He lowered corporate tax rates before and has said he may do this further. He de-regulated corporations and he is anti-union. All of these moves increase corporate profits, at least in the short-term. He also pushed the Fed Chairman, Jerome Powell, to continue lowering interest rates, but was largely unsuccessful in that.
While all these moves will likely increase immediate corporate profits and stock market gains, they all carry risk. Lowering corporate tax rates increases the national deficit. Deregulation is bad for the environment, increases the risk of corporate mismanagement and corruption, reduces oversight of developing technologies such as Artificial Intelligence and Cryptocurrency, and can cause any number of costly disasters, such as the train derailments that resulted from Trump’s deregulations of the travel industry. David Wilcox is an economist who I have found to be very prescient. He is former Fed staffer who is now the Director of US Economic Research at Bloomberg Economics and works at the Peterson Institute for International Economics. And this is what he concludes, “Trump has made it clear that he has no concern whatsoever for fiscal sustainability.”
Lowering interest rates is more complex. Whenever rates are lowered, it greases the gears of the economy, making money easier to borrow to fund growth and development. But it also risks causing inflation, as demand outpaces production. The deeper risk of lowering interest rates is that it leaves less grease to be used to stave off the next economic crisis. This is what we saw during the Biden administration, when the aftereffects of the Covid pandemic and the geopolitical conflicts in Ukraine and the Middle East strained the world economy. The Federal Reserve and the Biden Administration do not get enough credit for managing the economy in such a way that kept inflation relatively in check while avoiding a full-blown recession. Without such foresight and discipline, I believe we would be far worse off. But, as it is, inflation is back to pre-pandemic levels and the US Economy recovered faster than any other developed nation in the world. We can’t count on such foresight and discipline over the next 4 years. The good news is that the Fed Chairman, Jerome Powell, assured us yesterday that he will not resign, even if asked, and that the law prohibits him from being fired. The bad news is that his term ends in May 2026, at which time Trump can nominate a new Fed Chairperson.
The additional elements to be concerned about are candidate Trump’s promises to use increased tariffs to replace tax revenue, and to enact mass deportations of undocumented immigrants. Economists are largely in agreement that increased tariffs will simply pass the burden from corporations paying taxes to consumers paying increased prices. This will heat up trade wars, cause further isolationism from the world economy, and could lead to massive inflation and a recession. Mass deportations of undocumented immigrants, apart from humanitarian concerns, will cause massive economic concerns. The immediate impact is that this will shrink the workforce, thereby increasing wages, which will in turn cause more inflation. Undocumented immigrants buy goods, pay taxes, and largely support the food production and service industries. These factors will all raise prices, particularly food prices, and supercharge inflation.
I hope that his promises about tariffs and deportations represent his attempts to gain applause at rallies more than serious economic policies. He has made it clear that he does not follow through on much of what he says, often changes course, and makes impulsive decisions. There is also the hope that there are enough checks and balances left in Congress to temper the more extreme proposals. Regardless, there are significant concerns to be monitoring. As The Economist editors conclude, “It is going to be a turbulent economic ride, for America and the world. Buckle up.”
I will be following this all closely in the upcoming months, and it is likely that I will recommend decreased exposure to the stock market at some point in mid to late 2025.
Jeremy Watson CFP® IAR
Further Reading :
The Economist “The return of Trumponomics excites markets but frightens the world.”
Financial Times – “Economists warn Trump’s policies will trigger inflation”