Trump Won, What Now?

The initial market reaction to the Trump win was positive and only time will tell if rally was premature or the start of a longer trend. What’s unique about this incoming presidency is we’ve seen this administration before. To assume everything will repeat itself beat for beat is foolish but broader themes could play out again. Tax cuts and deregulation are chief among them.

Does the market repeat or at least resemble what we experienced in 2017-2021? The Fed was preparing to raise rates when Trump started his first presidency. Now the Fed is in a rate cutting cycle. Emerging markets were the best asset class in 2017 with a 38% return compared to the return of 22% for the S&P500. Now emerging markets has the most question marks with China’s struggles and shifting trade winds.

His isolationist policies also don’t look too different to his first term and during Biden’s term. Biden did not remove any Trump era tariffs; they are still enforced today. We don’t see much difference policy wise. Enforcement might be another issue with the heads of the FTC and SEC still unknown. From that standpoint, we do expect a more business friendly environment.  

Tax Cuts and Jobs Act Extension

With the Tax Cuts and Jobs Act set to expire at the end of 2025, a Republican sweep means there will be a good chance the tax cuts will either be extended or made permanent. There are still some pain points to work out such as the State and Local Tax cap (SALT cap). It’s currently at $10,000 and there is talk about raising it or eliminating the cap entirely.

In addition, the Trump campaign has said it wants to cut taxes on social security, overtime pay, and tipped wages. There were also proposals to cut taxes for first responders, military personnel, and Americans living abroad.

Absent a large boom in the economy and steep cuts to government spending, the tax cuts have been largely unfunded. The debt load has been exacerbated by multiple rounds of stimulus during Covid, but prior to that, the deficit in 2018 was $800 billion. It has been climbing even stripping out Covid spending.

A Department of Government Efficiency (DOGE) is expected to be created with Vivek Ramaswamy and Elon Musk leading the charge. Musk’s first goal is to cut $2 trillion in government spending next year. This figure will keep us level with current tax revenue and the projected spending. It will not add or decrease the debt. This doesn’t account for the additional proposed tax cuts noted above. To tackle the debt, more cuts would be needed to put the US in a surplus.

Deregulation

Banks and financial businesses have been under pressure over the last 15 years and have operated under a post housing crisis regulatory environment. Now it should be easier to do business with this administration.

We probably wouldn’t rush to load up on the financial sector. We’ve already seen what the financial sector did relative to the S&P500 during the first administration. The market might be rewarding the sector for something we’re not seeing but we don’t see how it’s historically justified. Was it difficult to operate a bank in 2017? Does it look so different in 2025?

Be cautious when assuming winners and losers. They’re not as straightforward as you might think.

Tariffs

Trump has already enacted tariffs in 2018 and Biden has kept them going. So we’ve already been living in a tariff world and most of us didn’t even notice. We didn’t get much inflation at the time when the tariffs were enacted. We had such low inflation that the country was strategizing ways to prevent deflation (prices going down, a bad thing). Covid happened and everyone now hates inflation. Wages went up but so did prices. People felt they could never get ahead.

Inflation may show a spike if tariffs are enacted. Price increases to pass to the consumer but once those increases stabilize, inflation should stabilize as well. The price levels will remain uncomfortably high and absent a steep recession, high prices are here to stay.

The thinking here is that the US would reduce its trade deficit. We import more than we export and have been for decades. Most of our goods are produced overseas. This is likely a feature of shifting more towards a service-based economy as opposed to a manufacturing economy. Manufacturing accounts for only 11% of GDP.

Inflation

The bond market started pricing in higher yields with the expectation of a Trump win. The underlying assumption is that the new policies will increase inflation again. Those higher yields are implying that we need to make room for a slowdown in rate cuts by the Fed.

This is another assumption we’re leery about. A good chunk of inflation was supply chain related, a consequence of shutting down the global economy. Reopening didn’t happen overnight and it took much longer to get goods into the country and into stores. The other pieces, services, was impacted by wholesale inventory delays.

While the Trump policies are more business friendly, inflation fears look to be overblown. The economy is already running strong and it could marginally get stronger. We just don’t see much economic activity above what’s already been trending.

Unless labor supply and the job market starts to tighten again.

Restrict Immigration

Like tariffs, we have seen what Trump’s impact on immigration is. The administration will restrict both legal and illegal immigration.

With our focus on jobs and economy, the biggest issue will be the shrinking labor pool. The US population has trouble keeping up with replacement, meaning we haven’t birthed enough kids decades ago to replace our elderly workers. Kids born in the 2000’s would be coming into the job market now. While the elderly are leaving the workforce at a slower pace than in the past, the sheer number of Boomers sailing off into the sunset is creating a demographic problem.

The US simply needs more able bodied and willing workers. There’s a slew of entry level jobs that haven’t been automated away that new entrants aren’t willing to do. It could be a product of comparing yourself on social media, but my daughter doesn’t want her first job to be at McDonald’s. She has higher aspirations and doesn’t see the appeal of working at a restaurant.

FTC and SEC Leadership

Crypto backers won big. They publicly backed Trump and donated lots of money to his campaign. Now they expect to see their rewards in the form of loosened regulation and enforcement. The current head of the Federal Trade Commission (FTC), Lina Kahn, was aggressive in going after big companies. Whether being accused of being a monopoly, or inappropriate mergers, the FTC of the Biden administration is widely seen as business unfriendly. The Security and Exchange Commission (SEC) head, Gary Gensler, was viewed as anti-crypto.  

Removing those two is seen as a big win for business and crypto. We would caution that Trump has a history of attacking companies in a public manner. He holds grudges and may use enforcement to get what he wants. While more business friendly, we don’t think he’s immune from clamping certain industries down. We just expect his most vocal backers would initially win.

What Now?

In a complete guess, this moment feels like the start of 2021 all over again. The air of speculative behavior seems to be coming back. We caution against jumping into anything with both feet. There have been bubbles and pops that left retail investors holding the bag.

There’s a lot that remains to be seen. In his second term, Trump may have less holding him back. There’s going to be something no one saw coming. The fact that markets are already declaring winners for the next administration gives us pause. There’s no way to know who’s really going to win, even when the signs seem so strong.

DISCLOSURES:

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

This document is for your private and confidential use only, and not intended for broad usage or dissemination.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of CWA strategies are disclosed in the publicly available Form ADV Part 2A.

Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.

Past performance shown is not indicative of future results, which could differ substantially.

Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.