Key Questions: What Do the Election Results Mean for the Economy, the Markets, and Your Portfolio?

As of this writing (mid-day on Wednesday, November 6), the election results are in, and the outcomes are largely known. Donald Trump will be returning to the White House, becoming only the second person in U.S. history to be reelected to non-consecutive presidential terms. His victory was a convincing one, which is important, for regardless of one’s political affiliation, most everyone should take some comfort knowing that a lengthy, protracted, and disruptive transition period will seemingly be avoided. This partially explains today’s stock market rally.

Elsewhere, Trump’s fellow Republicans will assume control of the U.S. Senate, having gained seats in West Virginia, Ohio, and (most likely) Montana. Control of the House of Representatives is still up in the air, and though the outcome may not be known for days, Republicans appear poised to assume control of this legislative body as well, albeit with a small margin.

Recounts and various legal challenges could ensue. Yet we believe that investors would be wise to begin making investment decisions on the assumption of a second Trump administration and a generally supportive Congress.

Under Trump 2.0, the tax cuts implemented in 2017 are likely to be extended. As a candidate, Trump campaigned on promises of additional personal income tax cuts and lower corporate taxes — however, passage of these provisions may be less likely given the already large budget deficit. Still, the extension of the 2017 tax cuts would likely be a positive for economic growth, all else being equal.

Trump also pledged regulatory relief, which could boost certain segments of the energy and financial services industries (among others), potentially giving rise to a resurgence of mergers and acquisitions (M&A) activity and a reopening of the initial public offering (IPO) window. This would be net positive for private equity transactions. On the other hand, parts of the technology sector may face continued scrutiny via antitrust concerns, whereas other tech companies may see further support framed as a way to strengthen domestic production of key manufacturing technologies such as semiconductors, for instance.

To pay for these pro-growth initiatives, Trump has a well-established history of using tariffs as a means to these ends. In particular, Trump has floated the idea of a 60% tariff on imports from China, and a 10% – 20% tariff on imports from the rest of the world. Handicapping the likelihood of these measures with precision would be a fool’s errand, as it is impossible to discern political rhetoric from policy reality. Still, it feels appropriate to assume that some tariffs will ultimately be applied and as such, corporations could retrench, consumer spending could slow, and inflation could rise.

Last, Trump also pledged immigration restrictions. Here, too, details are somewhat lacking, but on the surface, such controls could also cause inflation to move higher and limit economic growth.

Given this framework, the initial market reaction is consistent with expectations: Equities are generally stronger on belief that economic growth will be stronger; interest rates are higher (and bond prices are lower) on the premise that future inflation may be higher; and the U.S. dollar is stronger on the view that foreign countries may be disadvantaged by more restrictive trade policies (i.e., tariffs).

Positively, many of these align with our recommended tactical asset allocation positioning: Overweight U.S. equities versus the rest of world; overweight mid- and small-cap domestic stocks; and emphasize high-quality cyclical and reasonably priced growth stocks relative to high-priced momentum and defensive stocks. Moreover, our decision to lower our duration stance back to neutral within our fixed-income portfolios at the end of the third quarter has proven beneficial. Gold and other real assets are lagging today as market uncertainty ebbs; however, we advise maintaining exposures as a hedge against future uncertainty.

Irrespective of election outcomes, we continue to believe that investors should remain fully diversified, for while today is very much a “risk-on” day within the U.S. capital markets, the future is uncertain and tail risks remain — including the outlook for inflation, our country’s large deficit and debt burden, additional moderation in the U.S. labor market, and geopolitical tensions that could erupt with little warning. In addition, valuations today for U.S. stocks are roughly 33% higher than they were at the beginning of Trump’s first administration, which could limit future gains.

Countering these uncertainties, however, is the fact that regardless of which political party holds power, human ingenuity — one of our country’s most enduring and impactful attributes — will prevail. And this is why, regardless of election-related outcomes, we remain bullish on our United States of America.