A Trump win opens the door for tax cuts, deregulation and tougher trade policy. House control is key. Several factors could push up inflation. We stay risk-on in U.S. equities, supported by solid growth and earnings. Yet sticky inflation and higher-for-longer interest rates could eventually challenge risk sentiment.

Former President Donald Trump has won the U.S. presidency, with Republicans retaking control of the Senate. Control of the House of Representatives – where Republicans currently hold a narrow majority – is yet undecided. Control of the House would give a second Trump administration broader powers to enact its tax, energy, trade and regulatory agenda. 

President-elect Trump ran on a populist platform focused on illegal immigration, crime, tariffs, and tax cuts. His proposals include:

• Extending provisions of the Tax Cuts and Jobs Act, informally known as the “Trump tax cuts,” some of which are set to expire in 2025¹.

• Taxing imported goods and services. He has proposed a 10% (or higher) tariff on all imports and a 60% tariff on Chinese goodsⁱ. He has gone so far as to suggest a 200% (or higher) tax on cars built in Mexico¹.

• Increasing security at the U.S. border with Mexico and deporting millions of undocumented immigrants in hopes of reducing crimeⁱⁱⁱ and improving housing affordability¹.

• Scaling back regulations in an effort to unlock economic growth.

• Including the president in the Federal Reserve’s monetary policy decisions.

• Implementing a tax credit for family caregivers. Additionally, Trump’s running mate JD Vance has signaled an interest in expanding the annual Child Tax Credit from $2,000 to $5,000 per child¹.

Themes to Watch

We expect that the president-elect’s legislative agenda will be tempered before being put into effect. Having said that, several key areas of potential policy change - trade, immigration, regulation - are likely to be enacted by executive orders that do not require Congress. In the wake of the potential policy change, some of the key investments themes to consider, include: 

Inflation: Tariffs and immigration can be seen an inflationary. On trade, Trump has proposed a wide range of tariffs, including 60% on China and 10-20% universal tariffs. He will likely make this early priority. Such sweeping tariffs could reignite inflation, as the higher prices could mostly be paid by U.S. consumers. As for immigration, a tighter immigration policy on an already healthy labor market, could push labor costs up, resulting in higher inflation. It's worth keeping in mind any adverse impact might not be felt until 2026, according to Oxford Economics.

Regulation: We expect the Trump administration to move in the direction of removing or relaxing enforcement of existing regulations. We expect this to result in lighter bank regulation and lighter energy regulation. A de-regulatory agenda may be  positive for financials, healthcare, and energy economies. 

Taxes: Here at last we may have some certainty. Trump has called for extending the provisions of the Tax Cuts and Jobs Act, informally known as the “Trump tax cuts,” some of which are set to expire in 2025. Trump has also proposed more targeted tax policies, including eliminating federal income tax from tipped wages and Social Security income for seniors according to SEI investments. Tax cuts may or may not spur inflation, that will depend on the reason and the timing. If the tax cuts come about as the result of a recession, that could spur economic growth, but if tax cuts come in at a high-employment, low inflation environment, that could spur additional consumption, which could be seen as inflationary (Politifact). 

Investment Briefs

Equities: In the near term, we see U.S. equities supported by solid economic and corporate earnings growth, political clarity and Federal Reserve rate cuts. Longer term, much depends on how much of Trump’s agenda is enacted. We think energy, financial and tech sectors can benefit, partly from deregulation. We see multiple factors, including labor supply constraints, keeping inflation above pre-pandemic levels. 

International Equities: Tariffs could be negative for international stocks, but tariffs can be a bad idea and may be short term and limited. In our opinion, international equities can still have a place in an investor's portfolio. Over the past decade, the average P/E ratio for international stocks stands at 14.33, markedly lower than the U.S. average of 18.47 (Forbes).

Large Caps vs Small Caps: It's been a very good year so far for U.S. large cap stocks compared to U.S. small caps. As of November 4, 2024 the S&P 500 SPX Large Cap Blend was up 21.46% versus the small cap Russell 2000 Index RTY was up 10.23%. However, past performance is no indication of future performance, and we would be cautious about giving up on small-cap stocks, as anything can happen to the mega-stocks and we may see some reversion to the mean in 2025. 

Fixed Income: Stubborn or resurfacing inflation can be negative for fixed income holders. Here, it really depends on the purpose of the fixed income. We still believe parts of the fixed income market can provide diversification and a counter-weight to equities.

Sector Allocation: There may be a tendency for investors to clamor into the investment sectors seen most likely to benefit from the new administration. Here we advise to tread very carefully. While there may be an initial rush into the areas such as banking, there are other factors that can influence stock returns such as the economy, interest rates, and valuations. Even more, President-elect Trump's policies may not take effect for some time and may be watered down by the time enacted. 

Gold: The IAU Gold ETF is up 28% year-to-date as of November 6, 2024 (Morningstar). Gold pays no dividends and interest and usually comes with costs for storage. However, some believe in gold as an inflation hedge. The relationship between gold and inflation is complicated, there are times when gold hedged inflation quite well and other times not according to the CFA Institute, which referred to the gold and inflation relationship as "unstable". Here we see gold as more of portfolio diversifier than a possible inflation hedge, subscribing to the mantra "the more different things you can add to a portfolio the better." However, given the large run up we have seen in gold, we advise to tread carefully. 

Real Estate: We do believe in having some allocation to real estate as part of a diversified portfolio. Certainly real estate has had challenges - namely the commercial real estate market and higher interest rates have increased borrowing costs. If rates do go lower, and stay lower, we anticipate this will help real estate. Investment real estate does present some inflation hedges, namely the owner of real estate can increase rents, increasing your potential income as prices rise. 

Alternatives We remain constructive on alternative investments. This goes back to our mantra of building resilient portfolios by adding more different asset classes. Lower interest rates and a healthy economy should bode well for private equity. Private debt can benefit from a healthy economy as well. While many retail investors may own publicly traded securities, the reality is some 87% of US companies with revenues greater than $100 million are private (Source: S&P Capital). That is a large opportunity set to ignore. 

Source: S&P Capital April 2024

 

Final Thoughts

We build investment portfolios for our clients based on their individual goals, risk tolerance, and time horizon. We also believe it is usually best that investors pay strict attention to the market fundamentals and be careful not to only focus on the politics. Investment markets are complicated, and there are many factors that can influence returns.  As always, we remain committed to your financial success and will continue to make recommendations based not only economic and legislative developments, but also your individual circumstances.

For more information please email me at maloi@sfr1.com

To schedule a conversation to review your portfolio, please use my Microsoft Bookings Page. 

Michael Aloi, CFP

Disclaimer: The views and opinions contained above are solely those of the author, and do not necessarily reflect those of Summit Financial, LLC, or its affiliates. This material is based on information generally available to the public from sources believed to be reliable, but its accuracy and completeness are not guaranteed. This is being provided for informational purposes only.

Keep in touch: 

1. Source: SEI Investments

Disclaimer: Past performance is not a guarantee of future results. The views and opinions expressed in this post are solely those of the author and do not represent those of, nor should they be attributed to Summit Financial LLC. 

By clicking on these links, you will enter the web site created, operated and maintained by a third-party. The information and opinions found on this web site (sites) have not been verified by us, nor do we make any representations as to its accuracy and completeness. By linking to this web site, Summit Financial, LLC and affiliates are not endorsing this third-party’s products and services, or its privacy and security policies, which may differ from ours. We recommend that you review this third-party’s policies and terms and conditions to fully understand what information may be collected and maintained as a result of your visit to this web site.

Investment advisory and financial planning services offered through Summit Financial, LLC., an SEC Registered Investment Adviser. Insurance is offered through Summit Risk Management, LLC, an affiliate of Summit Financial, LLC. Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC Headquartered at 80 State St., Albany, NY 12207 ("PKS"). PKS and Summit Financial, LLC. ("Summit"), are not affiliated companies. Investments through PKS and Summit are:  NOT FDIC INSURED NOT BANK GUARANTEED  MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL NOT INSURED BY ANY STATE OR FEDERAL AGENCY  

Investors cannot directly purchase an index. Summit only transacts business in states where it is properly registered or notice-filed, or excluded or exempted from registration requirements. Follow-up and responses that involve the rendering of personalized investment advice and financial planning for compensation will not be made without state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. To learn more about the differences between brokerage and advisory services contact your Wealth Manager or go to https://summitfinancial.com/Important-Client-Information.pdf.

The Summit financial planning design team includes admitted attorneys and/or CPAs who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consultation with their independent tax or legal advisors.