Market Fundamentals Will ‘Trump’ Political Folly

Perhaps all times are historic, whether we live through them, or they come before or after we are here. However you voted in the 2024 election, the battle between Democrats, Republicans, and those who share common ground with neither party rose to historic levels this year. As a country, we now seek a unified way forward as 2025 begins.

With GOP victories across the Senate, House of Representatives, and the Presidency last month, we look in this newsletter at how the policies of the incoming administration may change and shape investment strategies.

Following the election, we witnessed some investor exuberance as many see GOP-led political strategies resulting in less regulation and lower corporate taxes. However, many questions remain about the future. What will the incoming administration decide about tariffs, interest rate policy, taxes, and regulation? How will these decisions influence the economy, the markets, your investment portfolios, and your financial plan?

Let’s look at tariffs first.

Tariffs

The markets are watching comments from the in coming administration for clues about the across-the-board tariffs the president-elect has floated and how he plans to implement them. Strategically, tariffs, or even the threat of tariffs, could represent valuable levers to forge new trade agreements with China and other nations.

Tariffs carry the specter of near-term downside risks to corporate earnings, the health of the US economy, and inflation. Unfortunately, and not unexpectedly, the devil will be in the details, and these are not yet available. Some companies are more concerned than others, but most have an idea of how things played out last time.

How large will the tariffs be? Which imports will be impacted? Which countries will the tariffs target? And, perhaps most importantly, how will those countries respond?

President-elect Trump has indicated that tariffs of 10% to 20% could soon be applied to all imports, and that goods imported from China could be subject to tariffs of up to 60%. But interestingly, U.S. imports from China are at a 20-year low, down from 20% in 2017 to 13.5% today. Additionally, the 2018 tariffs mostly impacted intermediate and capital goods categories, not most consumer goods, so the resulting inflation was fairly low.

Even as we look at the ‘2018 playbook’ for answers to these questions and speculate on how the new tariff policy will evolve over the coming weeks, uncertainty will remain until Inauguration Day and beyond. We believe our focus on high-quality domestic companies with strong profitability, strong balance sheets, ample ability to cover their debt, and healthy free cashflow are crucial for this uncertainty and is a position of strength across our portfolios.

Interest Rates

The Federal Reserve recently cut the overnight lending rate by another 0.25% and reduced 2025 potential rate cuts from four to two. But higher tariffs could contribute to “higher for longer” rates higher as well. If these tariffs are imposed on Mexico, Canada, China, and other countries, prices could inch higher, which may mean the Fed continues to hold interest rates.

We also face uncertainty about the role of the executive office in setting Fed policy. While campaigning, the President-elect indicated he may take a more influential role in monetary policy decision-making. With all Fed governors having terms that extend through at least May 2026, he is unlikely to replace those on the board; however, if he does attempt to force changes, complicated legal questions are expected to result. Some members of Congress have weighed in, vowing to review the Fed’s congressional charter. Some have argued that the Fed’s dual mandate of stable prices and full employment creates conflicts in policy. They contend that the Fed is a monetary institution and should only be concerned with stable prices.

Based on current economic conditions, with unemployment low, slowing inflation, and strong consumer spending, the Fed appears ready to continue with rate cuts, albeit fewer than before.

Tax Policy

Tax cuts are set to expire at the end of 2025. However, with Republican victories across every branch of the federal government, those tax cuts are now expected to be extended. These cuts include lower individual income tax rates, higher standard deductions, and higher estate tax exemptions.

Trump has also proposed a 15% corporate tax rate for revenue generated by “made in America” activity. We may also see a change to the limit for state and local tax deductions, and the removal of taxes on Social Security benefits, overtime, and tips, all campaign promises from President-elect Trump.

Legislators will need to determine how many tax cuts the annual federal budget can support and what other provisions might be included in the package to raise revenue as an offset, given that maintaining the no win-force deductions carries a price tag of $4.5 trillion, according to the Congressional Budget Office. Integrating Trump’s tax proposals from the campaign trail will more than double that amount. The new Department of Government Efficiency (DOGE) may have a positive impact in cost reductions to offset some of the tax cut price tag.

Watch for the quick action allowed by a parliamentary process called budget reconciliation where a simple majority in both chambers can pass tax code changes in 2025 that would go into force in2026.  

Deregulation

Many anticipate unified Republican control in 2025and beyond will herald an era of lighter regulation in areas such as banking, capital markets, cryptocurrency, and artificial intelligence. The new administration will also likely see the exodus of the heads of many high-profile regulatory agencies such as the Federal Reserve, the FDIC, and the SEC, among others.

Trump’s prior term saw historically low levels of new regulations, and he’s said little to suggest that his next term will break from that mold. Early developments, likely to occur shortly after Inauguration Day, may include a “regulatory freeze” where federal agencies pause the issuance of new regulations or policies until the new administration can review them for alignment with their policy directives, a standard practice for recent administrations assuming office from the opposing party.

Through the Congressional Review Act, many expect the repeal of rules finalized as the end of the current administration’s term nears. This will be followed, most likely, by a period of deregulation that could meet both policy and legal challenges.

Certain sectors or sub-sectors may benefit more than others because of these new policies. We continue to assess our specific holdings across the financial, technology, healthcare, and energy sectors and continue to lean into high quality companies.

Looking Ahead to 2025

President-elect Trump’s election victory on November 5, paired with GOP victories in the House and Senate, means that Republicans will have the unified government they need to act on the policy priorities touted by the former president on the campaign trail. In 2025,markets will undoubtedly be watching early policy priorities such as the debt ceiling and tax legislation, but tariffs, interest rate policy, and new and changing regulations will influence the markets as well.

Our investment committee often discusses the ‘megatrends’ that drive the economy no matter who, or what party, has control in Washington; trends that support a focus toward infrastructure, defense, healthcare, technology, and energy. As we consider our investment strategies against the goals of the new administration, we remain focused, as always, on our clients and how to best serve your evolving financial and planning needs.

We will continue to invest in and optimize our operations, investment research tools, and the relationship and service you have come to expect as the core of who we are. Thank you for the trust you place in us. We wish you a happy, healthy, and prosperous new year ahead.

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